Organizational Theory,

Design, and Change

CHAPTER 1

ORGANIZATIONS AND ITS

ENVIRONMENT
1-1
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After studying this chapter you should be able
to:
1. Explain why organizations exist and the purposes they serve.
2. What contribution do organizations make(Importance)
3. How Does an Organization Create Value?
4. Why Do Organizations Exist?
5. Types and Perspectives on Organizations
6. Understand how managers can utilize the principles of
organizational theory to design and change their
organizations to increase organizational effectiveness.
7. Identify the four principal ways/approaches in which
managers assess and measure organizational effectiveness.
8. Business/organisational environment
9. Corporate social responsibility (CSR)

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What is an Organization?
 Organizations are hard to see. We see projections,
such as a tall building, a computer workstation, or a
friendly employee, but the whole organization is
vague and abstract and may be scattered among
several locations, even around the world. We know
organizations are there because they touch us every
day.
 We hardly notice that we are born in a hospital,
have our birth records registered in a government
agency, are educated in schools and universities,
borrow money from a bank, turn to police and fire
departments when trouble erupts.
 Most of us spend many of our waking hours working
in an organization of one type or another.

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What is an Organization?(cont’d)
 Organization: a tool used by people to
coordinate their actions to obtain something
they desire or value.
1. Organizations provide goods and services
2. Organizations employ people
3. Organizations bring together people and
resources to produce products and services
4. Basically, organizations exist to create value

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Cont…
 An Organization Defined
 A deliberate arrangement of people to

accomplish some specific purpose (that

individuals independently could not
accomplish alone).
 Common Characteristics of Organizations
 Have a distinct purpose (goal)

 Composed of people

 Have a deliberate structure

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What contribution do organizations
make(Importance)
1) Organizations bring together resources (labour, materials) to
achieve desired goals and outcomes;
2) Produce goods and services efficiently (competitive prices,
benefits);
3) Facilitate innovation (e-business, computers, redesigning
organizational structures etc);
4) Use modern manufacturing and information technologies (e-
business, computers);
5) Adapt to and influence a changing environment
(globalization);
6) Create value for owners, customers and employees;
7) Accommodate ongoing challenges of diversity, ethics and the
motivation and coordination of employees (cope with growing
concerns about ethics and social responsibility).

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How Does an Organization
Create Value?
 Value creation takes place at three stages:
input, conversion, and output
 Each stage is affected by the environment in
which the organization operates
 Environment – the set of forces and
conditions that operate beyond an
organization’s boundaries but affect its
ability to acquire and use resources to
create value

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How an Organization Creates Value

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Why Do Organizations Exist?
5 major reasons why organizations exist:
 To increase specialization and the division of labor
 People working together to produce goods and services create
more value than people working alone
 Division of labor allows specialization
 Specialization allows individuals to become experts at their job
 To use large-scale technology
 Economies of scale: cost savings that result when goods and
services are produced in large volume
 Economies of scope: cost savings that result when an
organization is able to use underutilized resources more
effectively because they can be shared across several different
products or tasks

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Why Do Organizations Exist?
(cont.)
 To manage the external environment
 External environment consists of the political, social,
economic, and technological factors that affect
organizations
 Organizations regularly exchange products and services for
needed resources
 Organizations need to manage their external environment
 To exert power and control
 Organizations structure their members to efficiently
produce products and services
 To economize on transaction costs
 Transaction costs: the costs associated with negotiating,
monitoring, and governing exchanges between people who
must cooperate

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Why Organizations Exist

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Types of organizations
 Profit organizations: managers direct their
activities toward earning money for the
company.
 Non-profit Organizations: Managers direct
their effort toward generating some kind of
social impact.
 Problems: securing a steady income, difficult
to measure the effect, marketing as well for
the clients but also for volunteers and
donors.

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Assessment of Organizational
Effectiveness
 Key people in charge of the organization, such as top
executives or board members, have to make a
conscious decision about how they will determine the
organization’s effectiveness. Just as people determine
goals, they also determine when the organization is
successful.
 An employee might consider the organization is effective if it
issues accurate paychecks on time and provides promised
benefits.
 A customer might consider it effective if it provides a good product
at a low price.
 A CEO might consider the organization effective if it is profitable.

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 Why is Organizational Effectiveness
Important?
 What is the point is you are not going to
perform well?
 Maximizing value creation =
organizational effectiveness
 There are multiple ways to create value
and perform well
 4 primary ways /approaches are:
 Control: external resource approach
 Innovation: internal system approach
 Efficiency: technical/goal approach
 Satisfaction: the Strategic Constituents Approach
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15
16
Approaches to Measuring
Effectiveness

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18
 Organizational Stakeholders

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Major Stakeholder Groups of
organizations and What They Expect
 Managers strive, in their company policy, to at least
minimally satisfy the interests of all stakeholders :
 owners and stockholders (financial return),
 employees (satisfaction, pay, supervision),
 customers (high-quality goods, service, value),
 suppliers (satisfactory transactions, revenue from purchases),
 community (good corporate citizen, contribution to community
affairs),
 union (workers pay, benefits),
 government (obedience to laws and regulations, fair
competition),
 creditors (creditworthiness, fiscal responsibility),
 management (efficiency, effectiveness)

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 Business/organizational environment
 Environment refers to all external forces, which have
a bearing on the functioning of business.
 The organizational environment is the set of
forces surrounding an organization. These
forces may hamper or facilitate the
organization's access to resources, which
means they can both offer opportunities and
pose threats.
 Organizational environment encompasses all those
factors that affect a company's operations and
includes customers, competitors, stakeholders,
suppliers, industry trends, regulations other
government activities, social and economic factors
and technological developments.
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Environmental scanning defined

Environmental scanning is the process of

gathering information about events and their
relationships within an organization's internal
and external environments.
The basic purpose of environmental
scanning is to help management determine
the future direction of the organization.
Analysis of internal and external
environment is very important for the success
of a business.
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 Why Does the Environment Matter?
 Understanding the environment that
surrounds an organization is important to the
executives in charge of the organizations.
1. First, the environment provides resources that
an organization needs in order to create goods and
services.
2. Second, the environment is a source of
opportunities and threats for an organization.
3. Third, the environment shapes the various
strategic decisions that executives make as
they attempt to lead their organizations to success.
The environment often places important constraints
on an organization’s goals.

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 Types of environmental forces
 External Forces(macro)
 Those factors and forces outside the organization
that affect the organization’s performance.
These factors are not controllable by the


organization.
 Internal Forces(micro)
 Factors within the organization.

 These are controllable by the organization.

SWOT Analysis
 Strengths and Weaknesses
 Opportunities and Threats

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 1-25
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 The external environment

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 Cont’d
Technological Environment
 Technology is understood as the systematic
application of scientific or other organized
knowledge to practical tasks. Technology changes
fast and to keep pace with it, businessmen should
be ever alert to adopt changed technology in their
businesses.
 Economic Environment
 There is close relationship between business and its
economic environment. Business obtains all its
needed inputs from the economic environment and
it absorbs the output of business units.

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 Cont’d
 Political/ Legal Environment
 It refers to the influence exerted by the three political
institutions viz., legislature executive and the judiciary in
shaping, directing, developing and controlling business
activities. A stable and dynamic political environment is
indispensable for business growth.
 Global or international Environment
 Thanks to liberalization, now companies are forces to view
business issues from a global perspective. Business responses
and managerial practices must be fine-tuned to survive in the
global environment.
 Social and culture Environment
 It refers to people’s attitude to work and wealth; role of family,
marriage, religion and education; ethical issues and social
responsiveness of business.

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 Key External Forces & the Organization

Competitors
Suppliers
Distributors
Creditors
Key Customers Opportunities
External Communities &
Forces Stockholders Threats
Labor Unions
Special Interest Groups

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 The Nature of an External Audit

 The purpose of an external audit is to develop a

finite list of opportunities that could benefit a firm
and threats that should be avoided.
 The external audit is not aimed at developing an
exhaustive list of every possible factor that could
influence the business; rather, it is aimed at
identifying key variables that offer actionable
responses.
 Firms should be able to respond either offensively
or defensively to the factors by formulating
strategies that take advantage of external
opportunities or that minimize the impact of
potential threats.
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 The internal environment
 Internal environment is a component of the
business environment, which is composed of various
elements present inside the organization, that can
affect or can be affected with, the choices, activities
and decisions of the organization.
 It encompasses/includes the climate, culture,
machines/equipment, work and work processes,
members, management and management practices.
 Internal Environment. ... refers to the culture,
events and factors within an organization that has
the ability to influence the decisions of the
organization, especially the behavior of its human
resource.

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 Cont’d
 The key difference between internal and
external business environment is
that internal environment is specific and has
a direct impact on the business,
whereas external environment has an
impact on all business groups, not just one
particular business.
 Unlike the external environment, the
company has control over these factors.
 It is important to recognize potential
opportunities and threats outside company
operations.
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 Key Internal Forces & the Organization

Human Resources
&Internal Relationships
Company Image
Management Structure
Key Physical Assets Strengths
Internal R & D & Technological
Forces Capabilities &
Marketing Resources Weaknesses
Financial Factors

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 The nature of Internal Audit
 All organizations have strengths and
weaknesses in the functional areas of
business; no enterprise is equally strong or
weak in all areas. Internal
strengths/weaknesses, coupled with
external opportunities/threats and a clear
statement of mission, provide the basis for
establishing objectives and strategies.
 Objectives and strategies are established
with the intention of capitalizing upon
internal strengths and overcoming
weaknesses.
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 Importance of environmental study
 The benefits of environmental study are as follows;
1. Development of broad strategies and long-term
policies of the firm.
2. Development of action plans to deal with
technological advancements.
3. To foresee the impact of socio-economic changes at
the national and international levels on the firm’s
stability.
4. Analysis of competitor’s strategies and formulation of
effective countermeasures.
5. To keep oneself dynamic.

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Corporate social responsibility (CSR)
It refers to a manager’s duty or
obligation to make decisions that
nurture, protect, enhance, and
promote the welfare and well-being of
stakeholders and society as a whole.
Corporate social responsibility (CSR)
refers to a business practice that
involves participating in initiatives that
benefit society.

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Types of corporate social
responsibility
 Broad categories of social responsibility that
businesses are practicing:
Environment: One primary focus of corporate social
responsibility is the environment. Businesses, both large and
small, have a large carbon footprint. Any steps they can
take to reduce those footprints are considered both good for
the company and society as a whole.
Philanthropy: Businesses also practice social responsibility by
donating to national and local charities. Whether it
involves giving money or time, businesses have a lot of
resources that can benefit charities and local community
programs.
Ethical labor practices: By treating employees fairly and
ethically, companies can also demonstrate their corporate
social responsibility.

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Approaches to Social
Responsibility
1. Obstructionist approach: the low end of the
organization’s commitment to social responsibility
 Managers choose to behave unethically and
illegally
2. Defensive approach: a minimal commitment to
ethical behavior
 Managers attempt to stay within the law but
do not attempt social responsibility beyond
what is required by law

38 1-
cont.
3. Accommodative approach: the acknowledgment of
the need to support social responsibility
 Managers want to make the right choices when

called on to do so
4. Proactive approach: actively embrace the need to
behave in socially responsible ways
 Managers go out of their way to learn about the

needs of different stakeholder groups

 Willing to utilize organizational resources to
promote the interests not only of stockholders,
but of other stakeholders.

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Approaches to Social Responsibility

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 Why Be Socially Responsible?
1. Workers and society benefit directly because
organizations bear some of the costs of helping
workers.
2. Quality of life as a whole would be higher as a
climate of caring is encouraged.
3. It is the right thing to do .
4. Companies that act responsibly toward their
stakeholders benefit from increasing business and
see their profits rise.
5. Evidence suggests that managers who behave
socially responsibly will, in the long run, benefit all
organizational stakeholders .

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Summary
 Organizations are a tool people use to achieve their
goals
 Organizational theory is the study of how
organizations function and how they affect and are
affected by their environment
 Organizational effectiveness must be monitored by
managers
 CSR aims to embrace responsibility for corporate
actions and to encourage a positive impact on the
environment and stakeholders including consumers,
employees, investors, communities, and others.

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