MODULE 4

ORGANISATION-ENVIRONMENT
RELATIONSHIP MODELS

BUS 221
INTRODUCTION TO MANAGEMENT AND NIGERIAN BUSINESS
ENVIRONMENT
Lecturer

‘Seyy Sode
Department of Business Administration, University of Lagos
 Learning Outcome
At the end of this class you would be expected to possess
a clear knowledge of the following:

1.Nature of Organizations in their Environment

2.Organization-Environment Framework
3.Types of organisational environments.
4.Managing interdependencies and uncertainties
5.Perspectives of organisation-environment relationship
6.How organisations adapt to their environment
7.Models of how organisations operate and function in
their environments: (Systems and Interactive)
 Organizational environment: set of forces
surrounding an organization which may affect
its operation and access to scarce resources.

 Organizational domain: the range of goods

and services that the organization produces,
and the customers and other stakeholders
whom it serves
Organizational Environments
External environment – everything outside an
organization’s boundaries that might affect it.
General environment
Task environment

Internal environment – the conditions and

forces within an organization.

Not all parts of the environment are equally

important to all organizations. [small
organizations do not have BoDs, but corporations are
required to; private schools worry less about economic
conditions as do schools supported by the government,
etc]
Organization and Its Environment
 The External Environment
General environment is the set of broad
dimensions and forces in an
organization’s surroundings that create
its overall context.
International dimension
Technological dimension
Political-legal dimension
Socio-cultural dimension
Economic dimension
The External Environment. . . (continued)

Task environment consists of specific

organizations or groups that influence an
organization.
Competitors
Customers
Suppliers
Strategic partners
Regulators
 The General Environment
Economic Dimension

Overall health and vitality of the economic

system in which the organization operates.
Usually influenced by economic growth,
inflation interest rates and unemployment.
The General Environment. . . (continued)

Technological Dimension

Methods available for converting resources into

products or services.
Examples include:
CAD (computer-assisted design) techniques
Assembly-line techniques for car manufacturing and
hamburger assembly at McDonald’s
Use of internet in all areas of business
Integrated business software systems
The General Environment. . . (continued)

Socio-cultural Dimension
Customs, values and demographic characteristics of the
society in which the organization functions.
Socio-cultural processes determine the products, services
and standards of conduct that society is likely to value.
Consumer tastes change over time – preferences for color,
style, taste, etc change from season to season.
Socio-cultural factors influence how workers feel about
their jobs and organizations.
Appropriate business conduct varies from culture to
culture.
The General Environment. . . (continued)

Political-Legal Dimension
Refers to government regulation of business and
the relationship between business and
government.
The legal system partially defines what an organization
can and cannot do.
In western countries, periods of ‘pro-business’ and
‘anti-business’ climates can affect how businesses
operate. [mergers and acquisitions may not be possible due to worry about
organizations becoming too large and running small businesses out of
business.]
Political stability with other countries can affect
businesses willingness to trade with those countries.
The General Environment. . . (continued)

International Dimension
The extent to which an organizations is involved in or
affected by business in other countries.
Multinational firms are clearly affected by businesses
in other countries. [car and aircraft manufacturers,
restaurants, electronics firms, etc]
Advances in transportation and information
technology have linked all parts of the world, no
matter how remote.
Virtually every organization is affected by the
international dimension of its general environment.
 The Task Environment

Provides useful information more readily

than does the General Environment
because the manager can identify
environmental factors of specific interest
to the organization.
The Organizational Environment

Public pressure
Suppliers Customers
groups

The
Organization
Government Labor unions

Competitors
The Task Environment . . . (continued)

Competitors
Other organizations that compete with our
organization for resources.
Most obvious resource is customer dollars.
Organizations compete for bank loans, property,
quality labor, technological breakthroughs,
patents, scarce raw materials.
The Task Environment . . . (continued)

Customers
Whoever pays money to acquire an
organization’s products or services.
Customers of major organizations may include:
schools, hospitals, government agencies,
wholesalers, retailers and manufacturers.
Customers have more discriminating tastes and
new products’ and services’ expectations.
Companies who expand internationally face
critical differences [no beef served in India, alcohol served in Germany
and France as a part of the menu].
The Task Environment . . . (continued)

Suppliers

Organizations that provide resources for other

organizations.
McDonald’s depends on Heinz for its ketchup
packets and Coca-Cola for its soft drinks.
The Task Environment. . . (continued)

Strategic Partners (Allies)

Two or more companies that work together in joint
ventures or similar arrangement.
McDonald’s with Wal-Mart and Disney.
Strategic partnerships allow companies to share
expertise they lack, spread risk and open new
market opportunities.
Usually occurs with international firms. [Ford shares a
distribution and service center in South America with Volkswagen and builds minivans
in the US with Nissan]
The Task Environment . . . (continued)

Regulators
A unit that has the potential to control, legislate or
otherwise influence the organization's policies and
practices.
Regulatory agencies – created by the government to
protect the public from certain business practices or to
protect organizations from one another. [EPA, SEC, FDA, EEOC]
Interest groups – organized by their members to attempt
to influence organizations. No official power, but use the
media to call attention to their positions. [NOW, MADD, NRA,
the Sierra Club, Ralph Nader’s Center for the Study of Responsive Law,
Consumers Union, Better Business Bureau, etc].
 The Internal Environment
Internal Environment consists of:

Owners
Board of Directors
Employees
Physical Work Environment
Organizational Culture
The Internal Environment. . . (continued)

Owners
People who can claim property rights to an
organization.
Single individual who establishes and runs a small
business.
Partners who jointly own a business.
Shareholders who own shares of stock in a corporation
or other organization.
Companies who own other companies which are run as
wholly owned subsidiaries by the parent companies.
[McDonald’s owns bakeries that supply it with buns and have partial
ownership in other chains.]
The Internal Environment . . . (continued)

Board of Directors
Governing body elected by a corporation's
stockholders and charged with overseeing the
general management of the firm to ensure that it
is being run in a way that best serves the
stockholders’ interests.
The Internal Environment . . .(continued)

Employees
The nature of the workforce is changing in terms of gender,
ethnicity, age, etc.
Workers are also demanding more job ownership – partial
ownership in the company or more say in how they
perform their jobs.
Companies are relying on ‘temps’ more – less salary and
benefits cost – but no company loyalty.
Labor unions are presenting management with another
layer with which to deal – some companies deal with more
than one union.
The Internal Environment . . .(continued)

Physical Work Environment

An important consideration for many businesses.
Construction supervisors may rely on wireless
communication equipment to keep in touch with various
work crews.
Facilities may be spread out among various buildings in
the city, in rural or suburban areas, or in campus-like
facilities.
Some facilities have traditional offices on each side of a
hall, some modular cubicles with partial walls, or an even
more open arrangement.
The Internal Environment . . .(continued)

Culture
A set of values, beliefs, behaviors, customs and
attitudes that helps the members of the
organization to understand what it stands for,
how it does things and what it considers
important.
Plays an important part in shaping management
behavior.
Organization-Environment Relationships

Three basic perspectives can be used to

describe how environments affect
organizations:

1. Environmental change and complexity

2. Competitive forces
3. Environmental turbulence
1. Environmental Change and Complexity
James D Thompson theorized that organizational
environment can be described along two dimensions:
Degree of change – the extent to which the environment is
relatively stable or relatively dynamic.
Degree of homogeneity – the extent to which the
environment is relatively simple (few elements, little
segmentation) or relatively complex (many elements,
much segmentation).
These two dimensions interact to determine the level
of uncertainty faced by the organization.
Environmental Change and Complexity. . . (continued)

Uncertainty – unpredictability created by

environmental change and complexity.
Least environmental uncertainty is faced by
organizations with ‘stable’ and ‘simple’
environments. [Subway and Taco Bell focus on certain segments of the
consumer market, produce a limited product line, have a constant source of suppliers
and face relatively consistent competition]

Organizations with ‘dynamic’ but ‘simple’

environments generally face a moderate degree
of uncertainty [clothing manufacturers and certain CD producers who
target a certain kind of clothing or CD buyer but are alert to changing tastes]
Environmental Change and Complexity. . . (continued)

Moderate amount of uncertainty results in

organizations with stability and complexity.
[automobile manufacturers must interact with many suppliers, regulators,
consumer groups and competitors, yet change occurs quite slowly in this
industry despite changes in the styles of cars]

Very dynamic and complex environmental

conditions create a high degree of uncertainty. occurs
in the technology area due to rapid rate of innovation and change in consumer
markets which affect the industry, their suppliers and their competitors. Intel,
Sony, Compaq, IBM, Apple and internet-based firms like eBay and
Amazon.com face high levels of uncertainty]
Figure 3. Environmental Change,
Complexity, and Uncertainty
2. Competitive Forces
Michael E Porter proposes that managers
should view the organizational
environments in terms of five
competitive forces:
The threat of new entrants
Competitive rivalry
The threat of substitute products
The power of buyers
The power of suppliers
 Competitive Forces. . . (continued)

The threat of new entrants

The extent to which new competitors can easily enter a
market or market segment.
Entrance is easier for market requiring a small amount of
capital to open. [dry cleaner, pizza, hamburger or sandwich shop, etc.]
More difficult when it takes a tremendous investment in
plant, equipment and distribution systems [automobile
market, etc.]
The internet has reduced the costs and other barriers of
entry into many market segments so the threat has
increased for many firms.
 Competitive Forces. . . (continued)

Competitive rivalry
The nature of the competitive relationship
between firms in the industry.
Large firms, dominant in the field, engage in
price wars, comparative advertising and new-
product introductions.
Examples include: Coke and Pepsi; American Express
and Visa; Kodak and Fuji; US and foreign auto makers.
Small establishments, in contrast, do not
generally engage in such practices.
 Competitive Forces. . . (continued)

The threat of substitute products

The extent to which alternative products or
services may take the place of or diminish the
need for existing products and/or services.
Personal computers (PCs) have virtually
eliminated the need for calculators, typewriters
and large mainframe computers.
Sugar and salt substitutes are used more often.
DVD players will render VCRs obsolete in the
next few years.
 Competitive Forces. . . (continued)

The power of buyers

The extent to which buyers of the products or
services in an industry have the ability to
influence the suppliers.
Relatively few potential buyers for aircraft.
Therefore, buyers have considerable influence
over the price they are willing to pay, the
delivery date of the order, etc.
Buyers have virtually no power with products
that have very many willing buyers.
 Competitive Forces. . . (continued)

The power of suppliers

The extent to which suppliers have the ability to
influence potential buyers.
The power of the supplier depends on the
product being offered. The more restricted the
service or product, the more power to the
supplier. [electricity providers, telephone/internet access]
Small wholesaler of vegetables has little power,
since if people do not like the product, they can
easily find an alternative supplier.
3. Environmental Turbulence
Environmental change or turbulence which
occurs with no warning at all.
Most common is an organizational crisis of some sort.
9/11 affected travel, international and domestic
businesses.
Workplace violence – unhappy or dismissed workers
assault other workers.
Spread of computer viruses that can shut down
businesses around the world. [Love Bug virus in 2000]
Far too few organizations have developed crisis plans
and special teams to deal with such events.
 How Organizations Adapt to
Their Environment
Basic Techniques for Adapting

• Information Technology
• Strategic Response
• Mergers, Acquisitions and Alliances
• Organization Design and Flexibility
• Direct Influence
• Social Responsibility
Adapting – Information Technology

Important when forming an initial

understanding of the environment and
watching for signs of change.
Boundary Scanner is an employee [sales
rep or purchasing agent] who spends
much time in contact with others outside
the organization. Can keep up with what
is going on in other organizations.
Adapting – Information Technology

Environmental Scanning – managers

monitor the environments through
observation and reading.
Management Information Systems [MIS]
within the organization must gather and
organize information valuable to all
managers or specialists.
Adapting – Strategic Response
Strategic Options may include:

• Maintaining the present course

• Expanding the business [going international]
• Shrinking the business or shutting down certain
areas
Adapting – Mergers, Acquisitions and Alliances

Merger – two or more firms come

together under one name. [Banoco and Bapco]
Acquisition – one firm buys another firm
out. [Starbucks and Seattle Coffee Company]
Hostile Takeover – a firm takes another firm over
by force.
Alliance – two or more firms undertake a
venture together, but each keeps its own
identity. [British Airways and American Airlines; McDonald’s with Disney and
Wal-Mart]
Adapting – Organization Design and Flexibility

Mechanistic Organization Design:

Firms operating in low levels of uncertainty who
operate under rigid rules, regulations and standard
operating procedures [SOPs].
Managers have little flexibility with decision
making.
Organic Organization Design:
Firms operating in high levels of uncertainly who
operate with relatively few SOPs.
Managers have great flexibility with decision
making and can react quickly to environmental
changes.
 Adapting – Direct Influence
Suppliers may be influenced to sign long-term contracts with
fixed prices.
Companies may become their own suppliers. [McDonald’s owns
bakeries; Campbell’s makes its own soup cans, etc.]

Certain activity may affect an organization’s competitors. [car

manufacturer discounts and upgrades in warranties, electronic products warranty and price
changes, etc]

Advertising to show people new uses for products, finding

new customers, taking customers from competitors, etc.
Lobbying and bargaining with government and other
regulating agencies to influence decisions that might affect the
organization/industry.
 Adapting – Social Responsibility
Social Responsibility is the set of obligations an
organization has to protect and enhance the
societal context in which it functions.
Organizational stakeholders include:
Person or organization directly affected by the practices of
an organization and has a stake in its performance – suppliers,
employees, customers, creditors, interest groups, trade associations, local
community.
Natural environment – air, water, noise pollution, recycling, waste
control, etc.
General social welfare – charities, supporting events, boycotting
products from certain countries.
See Figure, 3.5, page 93.
How Organizations Adapt to Their
Environments:
General environment

Task environment Information

management
Mergers,
takeovers
Social acquisitions,
responsibility alliances
The
Organization

Strategic Direct
responses influence

Organization
design and
flexibility
JAMES D. THOMPSON
SYSTEMS MODEL OF
ORGANIZATION
The Organization in its Environment
 Organizational Domain
“The domain of an organization is the claim it stakes
out for itself with respect to: (1) range of products
offered, (2) markets served, and (3) services rendered.”

Domain is closely related to the task environment of the

organization.
The Organizational Domain
 DOMAIN CONSENSUS
Domain consensus is the extent that there is general
agreement on an organization’s expectations both for
members of an organization and for others with whom
they interact, about what the organization will and will
not do.

Selection of a specific domain significantly influences

other choices that an organization must make (financing,
structure, personnel, etc.)

Organizations may have multiple domains.

 DOMAIN CONFLICT
Domain conflict exists when there is a lack of
recognition or agreement about the organization’s
role within its larger environment.

Ex.-Chiropractors in the medical field

Self-proclaimed role vs medically recognized role

Establishment of a domain cannot be an arbitrary,

unilateral action.
 UNCERTAINTY IN THE
ENVIRONMENT
Simple
Small number of Small number of
external elements. external elements.
Elements remain the Elements are in
same or change slowly continuous change
DEGREE OF
HOMOGENEITY
Large number of Large number of
external elements. external elements.
Element remain the Elements are in
same or change slowly continuous change.
Complex
Stable Dynamic
DEGREE OF CHANGE
 UNCERTAINTY IN THE
ENVIRONMENT
Simple
LEAST MODERATE
UNCERTAINTY UNCERTAINTY

DEGREE OF
HOMOGENEITY

MODERATE MOST
UNCERTAINTY UNCERTAINTY

Complex
Stable Dynamic
DEGREE OF CHANGE
 UNCERTAINTY IN THE
ENVIRONMENT
Simple
Soft drink bottlers, Personal computers,
beer distributors, fashion clothing,
container manuf., music industry, toy
local utilities manufacturers
DEGREE OF
HOMOGENEITY
Airline operators,
Universities, hospitals, oil companies,
Insurance companies electronic firms,
aerospace firms
Complex
Stable Dynamic
DEGREE OF CHANGE
 BURNS & STALKER
Used interviews with managers and their own
observations to evaluate the impact of environment
on organizational structure and management practice.

The type of structure that existed in rapidly changing

and dynamic environments was different from that
in organizations with stable environments.

B & S labeled the two types organic and mechanistic,

respectively
 ORGANIC ORGANIZATION
Organic organizations are relatively flexible and adaptable.
They rely on lateral communication rather than vertical
communication. Influence is based upon expertise and
knowledge rather than on authority of position.
Responsibilities are defined loosely rather than rigid job
definitions. Emphasis is on exchanging information rather
than on giving direction.
 MECHANISTIC
ORGANIZATION
Mechanistic structures are characterized by high
complexity, formalization and centralization. They
perform routine tasks, rely heavily on programmed
behaviors, and are relatively slow in responding to
the unexpected.
 BURNS & STALKER
CHARACTERISTIC MECHANISTIC ORGANIC

Task Definition Rigid Flexible

Communication Vertical Lateral

Formalization High Low

Control Centralized Diverse

Influence Authority Expertise

 EMERY & TRIST
Offer a model that identifies four kinds of environments
that organizations might confront:

1. Placid-randomized
2. Placid-clustered
3. Disturbed-reactive
4. Turbulent-field

Placid-randomized is least complex, Turbulent-field is

the most complex.
 PLACID-RANDOMIZED
ENVIRONMENTS
This environment is relatively unchanging. Therefore,
environmental uncertainty is low. Environmental
demands are distributed randomly, and change slowly.

Managerial decision making does not give much

attention to the environment.
 PLACID-CLUSTERED
ENVIRONMENT
Environment changes slowly, but threats are clustered,
not random. The forces in the environment are linked,
and pose a higher threat than randomized changes.

These organizations use long-range planning and

forecasting to learn as much as possible about their
environments. Structures will tend to be centralized.
 DISTURBED-REACTIVE
ENVIRONMENTS
A more complex environment than either placid one.
Many similar organizations seeking similar ends. One
or more may be large and have ability to influence the
environment. Two or three large companies can
dominate an industry.

Organizations in this type of environment used planned

tactical initiatives, calculate reactions by other, and
develop counteractions. This requires flexibility and a
structure with some decentralization.
 TURBULENT-FIELD
ENVIRONMENTS
The most dynamic of the environments and has the
highest level of uncertainty associated with it.
Environmental elements are increasingly organized
and interrelated.

Major, dynamic shifts can occur in the environment as

one, or a small group of large companies “change the
rules” of competition. Thus, planning is not as useful
here.
 STRUCTURAL IMPLICATIONS
Emery and Trist did not recommend specific structural
configurations associated with each environmental
type. However, the two placid environments should be
responded to with mechanistic structures, whereas the
disturbed and turbulent environments require more
organic structures. As the environment becomes more
volatile, increasing flexibility Is needed to cope with or
manage the uncertainty that increases.
 ENVIRONMENTAL
UNCERTAINTY - THOMPSON

The fundamental core of the organization requires

“technical rationality.”

Norms of rationality require that the organization

attempt to “seal-off” or protect its technical core from
environmental influences.
 INTERNAL STRATEGIES

Organizations regulate the flows of inputs and outputs to

their central technical cores through such internal
responses as buffering, smoothing (leveling), forecasting,
and rationing.
 BUFFERING
On the input side, buffering usually takes the form of
stockpiling critical resources whose supply is uncertain
or whose price fluctuates widely over time.

On the output side, buffering typically involves building

and keeping up warehouse and distribution inventories.

By buffering, environmental uncertainties are absorbed

because an organization’s technical core produces at a
constant rate. Other methods of buffering might include
preventative maintenance and recruiting and training.
 SMOOTHING (LEVELING)
Where buffering absorbs environmental uncertainties,
smoothing involves efforts to manage environmental
uncertainties. Smoothing attempts to protect the technical
core by reducing uncertainties associated with cyclical
variations in product or service demand.

Examples might include differential costs of long distance

telephone calls that are lower during non-peak times,
discount airline fares for off-time flights.
 FORECASTING
When buffering and smoothing will not effectively protect
an organization’s technical core, organizations can often
reduce uncertainty and behave in a logical, rational manner
by developing accurate forecasting capabilities. To the
degree that environmental fluctuations can be predicted,
they can be treated as constraints and adapted to.
 RATIONING

 Finally, when the organization finds that neither buffering,

smoothing, nor forecasting is sufficient to prevent
environmental penetration, organizations can turn to
rationing.
 The allocation or assignment of resources according to
established priorities can be seen in the making of
reservations, reserved seats at theaters, etc., and rationing
(such as gasoline rationing during the oil embargo).
 In general, rationing is a less than satisfactory solution,
because it indicates that the organization is not fully serving
its task environment. It can be costly in terms of lost revenue
and customer goodwill (Atari, Cabbage Patch dolls, etc.)
 EXTERNAL STRATEGIES
Besides strategies for dealing with uncertainty in their
internal environments, organizations also have strategies
for dealing with uncertainty in their external (general)
environments.

The actual relations, or interactions, between organizations

are the responsibility of boundary personnel. The boundary
spanners or gatekeepers, are important because they mediate
the flow of information, products or services, and personnel
between organizations in its environment.
ROLE OF THE BOUNDARY SPANNER
EXTERNAL STRATEGIES II
Thompson identified two direct strategies for managing
external dependencies such as suppliers, customers,
banks, etc.:

COMPETITIVE STRATEGIES
COOPERATIVE STRATEGIES
 COMPETITION
Refers to rivalry between two or more organizations which
is mediated by a third party. In the case of a manufacturer,
the third party might be a customer, distributor, supplier or
potential employee. In each instance, the third party must
select among alternative courses of action (For example,
which of several competing products to purchase).
 COOPERATION
There are three types of cooperative strategies
available to organizations:

1. Bargaining
2. Coopting
3. Coalescing
 BARGAINING
In an effort to limit the uncertainty caused by competition,
organizations often respond by entering into cooperative
relationship. Bargaining refers to direct negotiations
between organizations for the exchange of goods and
services.

Such contractual arrangements, to the extent that they are

binding and enforceable, serve to reduce environmental
uncertainty. Examples might include long term contracts
with suppliers or customers, labor contracts, etc.
 COOPTING
Is the process of absorbing external elements into the
decision-making or policy-determination structure of
an organization as a means of averting threats to its
stability or existence. This allows for a reduction of
environmental uncertainty, but not its elimination.

Examples might include members of a Board of Directors

chosen from primary groups in the organization’s
environment (A banker, a major supplier, a Board member
from a competitor, etc.)
 COALESCING
Is the combination of two or more organizations (groups
or individuals) for a single purpose. It requires a joint
commitment for mutual action.

Examples might include mergers, joint ventures, inter-

locking directorates, price fixing, etc.
 COSTS
Competition, bargaining, cooptation, and coalescing
represent a continuum of “increasingly ‘costly’ methods
of gaining support in terms of decision making power.”

Competition is seen to be the least costly method, through

coalescing being the most costly.
 INDIRECT STRATEGIES
Thompson also identified four different indirect strategies
for dealing with external environmental uncertainty:

1. Influencing government regulations and legislation

2. Trade associations and professional organizations
3. Lobbies
4. Political Action Committees
 LAWRENCE & LORSCH
Studied ten firms in three industries: plastics, food and
containers. The three industries were deliberately
chosen as they differ significantly in the environmental
uncertainty associated with each one.

The underlying hypothesis was that internal environments

of the firms must match the external environmental
requirements. The better the match, the more successful
the firm.
 DIFFERENTIATION &
INTEGRATION
Differentiation and integration was posited as the variables
to examine to determine the state of the internal environment.

Differentiation, according to Lawrence & Lorsch, closely

resembles the traditional definition of horizontal
differentiation, but in addition to task segmentation,
suggested that managers will differ in their:
(1) time frame management,
(2) (2) interpersonal orientation, and
(3) (3) goal orientation

Integration is the quality of collaboration needed to overcome

differentiation and achieve unity of effort among units.
LAWRENCE & LORSCH MODEL
 DEPARTMENTAL DIFFERENTIATION BASED
UPON SUBENVIRONMENT CHARACTERISTICS
TIME, GOAL & INTERPERSONAL
ORIENTATIONS
INTEGRATION TECHNIQUES AND
APPROPRIATE ENVIRONMENTS
LAWRENCE & LORSCH FINDINGS
STRUCTURE VS ENVIRONMENT
 ENVIRONMENT AND ORGANIZATION DESIGN
CHARACTERISTICS
Environment Design Characteristics
Degree of Degree of Quad- Decentral- Span of Formal- Complexity Design
Change Complexity rant ization Control ization Strategy
Simple I Low Few High Low Funct./
Stable Mech.

Complex II Low Many High High Funct./

Mech.
w/T/T.F.
Simple III High Few Low Low Product/
Dynamic Organic

Complex IV High Many Low High Matrix &

Combos
 ENJOY....

ONCE AGAIN I SAY ENJOY!!!