Organizations
and
Environments
MBA 540
Summer 2006
Essential Features of
Organizations
 Open system: input, transformation, output
 Subsystems: boundary spanning, production,
maintenance, adaptation, management
 Domains: range of products and services produced
for serving markets and customers
 Environmental transactions: dealing with factors
outside the organizational boundaries
Open Systems View of
Organization
ENVIRONMENT
Raw
Materials
Products
Input
Transformation
Output
Organization
Resources
Services
Boundary
Spanning
Production
Maintenance
Adaptation
Management
Subsystems
Boundary
Spanning
Let’s Consider Hasbro
 Toy industry's growth prospects appear
to be maturing
 Increasing competition from video
games, children's changing tastes, and
consolidation of the industry's retail
customer base.
 Toy companies are increasingly
dependent on movies and TV shows for
product tie-ins
What are the major external challenges
facing Hasbro?
www.hasbro.com
Changing Environments
Environmental Change
Environmental Complexity
Resource Scarcity
Uncertainty
Environmental Change
 Environmental change is the rate at which a
company’s environments change
 stable environments
 dynamic environments
 Punctuated equilibrium theory

companies cycle through stable and dynamic
environments
Punctuated Equilibrium
3rd Revolutionary Period: Following
September 11th terrorist attack.
U.S. Airline Industry
$15,000,000
Operating
$10,000,000
1st Revolutionary
Period:
Deregulation of U.S.
Airline Industry
$5,000,000
-$5,000,000
Operating
-$10,000,000
-$15,000,000
Year
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
$0
1976
$ in Thousands
Equilibrium: Followed by
another period of industry
stability.
2nd
Revolutionary
Period: Rising
Cost of Jet Fuel
and Employee
Salaries and
Benefits
Equilibrium: Followed by a
period of industry stability.
Environmental Complexity
 Environmental complexity: the number of external
factors in the environment that affect organizations

Simple environments



have few environmental factors
Example?
Complex environments


have many environmental factors
Example?
Environmental Uncertainty
 Simple -Complex
Dimension


Number of elements
and their similarity
Family restaurant vs.
automobile
manufacturer
 Determines what
information you need
 Stability-Change
Dimension



how fast and
unpredictably
elements change
Universities vs.
telecommunications
Determines how
often you need to
collect information
Environmental Uncertainty
Rate of Change
Low
High
Low
Complexity
High
Low
Uncertainty
(Information known
and available)
Moderate
Uncertainty
(Information
overload)
Moderate
Uncertainty
(Constantly need
new information)
High
Uncertainty
(Information needs
unknown)
Resource Scarcity
 Resource scarcity
(vs. munificence) is
the degree to which
an organization’s
external
environment
has an abundance
or scarcity of critical
organizational
resources
Environmental Uncertainty
 Uncertainty is how well managers can
understand or predict the external changes
and trends affecting their businesses
More
Complexity
+
More
Change
+
Scarcer
Resources
More
Uncertainty
Types of
Environmental
Factors
Organization
Specific Environment
General Environment
Specific factors directly impinge on
particular organization
General factors affect all companies
within an industry
Organization-Environment
Interface
 Task (specific)
factors








 General factors

Customers
Suppliers
Distributors
Regulatory agencies
Competitors
Unions
Partners
Special Interest
Groups






Economic
International
Political/legal
Technology
Demographic
Cultural/social
Physical/natural
resources
Example: Home Depot
Theories of OrganizationEnvironment Relationships
 Contingency Theory
 Resource Dependence
 Strategic Choice
 Population Ecology
 Institutional Theory
 Transaction Cost Theory
Contingency Theory
 Most effective way to organize is contingent on
complexity and change in environment
 Stable environments: Mechanistic structures
(specialization, formality, hierarchy)
 Changing environments: Organic structures
(less specialization, informality, lateral relations)
Resource Dependence
•
•
•
•
Organizations obtain scarce and
valued resources from environments
Desire to control these resources to
minimize dependencies
Processes and transactions used to
obtain resources develop
dependencies
Balancing act of maintaining
autonomy and recognizing
dependencies
Strategic choice
•
•
•
•
•
•
Managers perceive environments
Make strategy and design structure
Re-strategize when changes are
perceived
Managers enact environments
through their decision-making choices
Since managers perceive differently,
they bring organizations in different
directions
Example: Sears vs. Montgomery
Ward
Population Ecology
 Focus is on whole population of
organizations (e.g., gasoline stations in
Canada; wine industry in California)
 Natural selection processes:
Variation
Selection
Retention
 Unsuccessful organizational forms die out

Environmental determinism
Institutional Theory
•
•
•
•
•
Societal institutions are powerful forces for
ensuring control and order
In responding to institutional pressures,
organizations develop isomorphic (similar)
strategies, structures, and systems
Normative, coercive, and mimetic forces
make “all organizations look the same”
Goal is to obtain social legitimacy
Example: banks, universities, discount
stores
Transaction Cost Theory
 Organizations try to reduce monitoring,
negotiating, and governing exchanges with
environmental elements (transaction costs)
 Environmental uncertainty, opportunism,
bounded rationality, small numbers
bargaining, asset specificity, and risk levels
increase transaction costs
 Transaction and bureaucratic costs balanced
What specific adaptation
devices do organizations use?
 Structural Responses






Develop new positions or units
Boundary-spanning activities
Buffering roles and units
Planning Groups
Forecasting
Management Information
Systems
Specific Adaptation Devices
Inter-organizational Linkages:
 Symbiotic interdependencies
 Benefit
both organizations
 Competitive interdependencies
 Direct
competition for scarce
resources
Symbiotic Interdependencies
 Good
reputation
 Cooptation
 Interlocking
directorates
 Strategic alliances
 Long-term
Contracts
 Equity ownership
in other firms
 Joint
ventures
 Mergers,
acquisitions, and
takeovers
 Licensing
 Consortia
 Marketing or
distribution
agreements
 Franchising
Competitive
Interdependencies
 Collusions
 Regulatory bodies
 Signaling
 Competitive strategic
 Cartels
alliances
 Networking
 Trade associations