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Chapter 4

Chapter 4 BU398.docx

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Shawn Komar

BU398 Chapter 4 – The External Environment Week 4 The Environmental Domain -Organizational environment – all the elements that exist outside the boundary of the organization that have the potential to affect all or part of the organization -The environment of an organization can be understood by analyzing its domain within external sectors -Domain – an organization’s chosen field of action -Domain defines the organization’s niche and defines those external sectors with which the organization will interact to accomplish its goals -Ten sectors can be analyzed for each organization: -Industry -Raw materials -Human resources -Financial resources -Market -Technology -Economic conditions -Government -Sociocultural -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 -The task environment typically includes the industry, raw materials, and market sectors, and perhaps the human resources and international sectors -Ex. Industry sector – Walmart has become the US largest food retailer -Ex. Raw materials sectors – Steelmakers owned the beverage can market until the mid-1960s when Reynold’s aluminum company launched a huge recycling program -Ex. Market sector – Keeping up with the consumers’ rapidly changing tastes is a head ache for food companies that Kraft does well – Ritz, Jello, etc. -Ex. Human resources sector – Increased investment in talent development and training -Ex. International sector – Outsourcing General Environment -Includes those sectors that might not have a direct impact on the daily operations of a firm but will indirectly influence it -Includes the government, sociocultural, economic conditions, technology, and financial resources sectors -Ex. Government sector – NAFTA -Ex. Sociocultural sector – Shifting demographics -Ex. General economic conditions – When the economy crashes -Ex. Technology sector – Massive changes have occurred like digital music -Ex. Financial resources – all organizations have to be concerned with finances 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 be affected by international events -The distinctions between domestic and foreign operations have become increasingly irrelevant -The growing importance of the international sector means that the environment for all organizations is becoming extremely complex and extremely competitive -Every organization faces uncertainty domestically as well as globally Environmental Uncertainty -The patterns and events occurring in the environment can be described along several dimensions, such as whether the environment is stable or unstable, homogeneous or heterogeneous, simple or complex -Determining an organization’s environmental uncertainty generally means focusing on sectors of the task environment, such as how many elements the organization deals with regularly, how BU398 Chapter 4 – The External Environment Week 4 rapidly these elements change, and so forth -To assess uncertainty, each sector of the organization’s task environment can be analyzed along dimensions such as stability or instability and degree of complexity -Organizations must cope with and manage uncertainty 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, which refers to heterogeneity, or the number and dissimilarity of eternal elements relevant to an organization’s operations -The more external factors that regularly influence the organization and the greater number of other organizations 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 and different external elements Stable-Unstable Dimension -Refers to whether elements in the environment are dynamic -An environmental domain is stable if it remains the same over a period of months or years, or experiences readily predictable change -Under unstable conditions, environmental elements shift abruptly and unexpectedly -Environmental domains seem to be increasingly unstable for most organizations -Instability may occur when competitors react with aggressive moves and countermoves regarding advertising and new products -Although environments are more unstable for most organizations today, an example of a traditionally stable environment is a public utility – a gradual increase in demand may occur, which is easily predicted over time Framework -The simple-complex and stable-unstable dimensions are combined into a framework for assessing environmental uncertainty -In the simple, stable environment, uncertainty is low -The complex, stable environment represents somewhat greater uncertainty -Greater uncertainty is felt in the simple, unstable environment -The greatest uncertainty is in the complex, unstable environment -Ex. Beer distributor is in a simple, stable environment – demand for beer changes only gradually -Ex. Toy manufacturers are in simple, unstable environments -Ex. Airline industry faces complex, unstable environments – many external sectors are changing simultaneously which affects them Adapting to Environmental Uncertainty -An organization in a certain environment will be managed and controlled differently from an organization in an uncertain environment with respect to positions and departments, organizational differentiation and integration, control processes, and future planning and forecasting Positions and Departments -As the complexity and uncertainty in the external environment increases, so does the number of positions and departments within the organization, which in turn increases internal complexity -Each sector in the external environment requires an employee or department to deal with it -The HR department deals with unemployed people who want to work for the company -The marketing department finds people -The finance department deals with bankers, etc. BU398 Chapter 4 – The External Environment Week 4 -Many companies have added e-business departments to handle electronic commerce and IT departments to deal with the increasing complexity of computerized information and knowledge management systems Buffering and Boundary Spanning -Buffering roles – purpose is to absorb uncertainty from the environment -Buffer departments surround the technical core and exchange materials, resources, and money between the environment and the organization -Some organizations are trying 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 customers and suppliers is more important than internal efficiency -Opening up the organization to the environment makes it more fluid and adaptable -Boundary-spanning roles – link and coordinate an organization with key elements in the external environment -Primarily concerned with the exchange of information to (1) detect and bring into the organization information about changes in the environment and (2) send information 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 -To detect and bring important information into the organization, boundary personnel scan the environment -One new approach to boundary spanning is business intelligence, which refers to the high-tech analysis of large amounts of internal and external data to spot patterns and relationships that might be significant -Another area of boundary spanning is competitive intelligence (CI) which gives top execs a systematic way to collect and analyze public information about rivals and use it to make better decisions -Many successful companies involve everyone in boundary-spanning activities -The boundary task of sending information into the environment to represent the organization is used to influence other people’s perception of the organization -Many companies set up their own web pages to present the organization in a favourable light Differentiation and Integration -Organizational differentiation – 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 -A study found that each department evolves toward a different orientation and structure to deal with specialized parts of the external environment -Integrati
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