osd-external environment

1. 4-1
The External
Environment
KBL Srivastava
1

2. What is the Organizational
Environment?
 Environment: the set of forces
surrounding an organization that have
the potential to affect the way it
operates, and its access to scarce
resources
 Organizational domain: Chosen
environmental field of action. The
particular range of goods and services
that the organization produces and the
customers and other stakeholders
whom it serves 2

3. The Specific Environment
 The forces from outside stakeholder
groups that directly affect an
organization’s ability to secure
resources
◦ Outside stakeholders include customers,
distributors,unions, competitors, suppliers,
and the government.
 The organization must engage in
transactions with all outside
stakeholders to obtain resources to 3

4. The General Environment
 The forces that shape the
specific environment and
affect the ability of all
organizations in a particular
environment to obtain
resources
4

5. The General Environment
 Economic forces: factors, such as
interest rates, the state of the
economy, and the unemployment rate,
determine the level of demand for
products and the price of inputs
 Technological forces: the
development of new production
techniques and new information-
processing equipment, influence many
aspects of organizations’ operations
5

6. The General Environment
 Political and environmental forces:
influence government policy toward
organizations and their stakeholders
 Demographic, cultural, and social
forces: the age, education, lifestyle,
norms, values, and customs of a
nation’s people
◦ Shape organization’s customers,
managers, and employees
6

7. An Organization’s
Environment
7
(a) Competitors, industry size and
competitiveness, related issues
(b) Suppliers,
manufacturers, real
estate, services
(c) Labor market,
employment agencies,
universities, training
schools, employees
in other companies,
unionization
(d) Stock markets,
banks, savings and
loans, private
investors
(e) Customers, clients,
potential users of products
and services
(f) Techniques of production, science,
computers, information technology
(g) Recession, unemployment rate,
inflation rate, rate of investment,
economics, 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 rates
(j)
International
Sector
(d)
Financial
Resources
Sector
(e)
Market
Sector
(f)
Technology
Sector
(g)
Economic
Conditions
Sector
(a)
Industry
Sector
(h)
Government
Sector
(c)
Human
Resources
Sector
(b)
Raw Materials
Sector
(i)
Sociocultural
Sector
ORGANIZATION
DOMAIN

8. Organizational Departments
Differentiate to Meet Needs of
Sub-environments
8
Market
Sub-environment
Customers Advertising
Competitors agencies
Distribution
system
Manufacturing
Sub-environment
Labor Raw Suppliers
materials
Production
equipment
Scientific
Sub-environment
Scientific Research
journals centers
Professional
associations
President
R & D
Division
Sales
Division
Manufacturing
Division

9. Orientations Among
Organizational
Departments
Characteristic
R & D
Department
Manufacturing
Department
Sales
Department
Goals
New
developments,
quality
Efficient
production
Customer
satisfaction
Time
Horizon Long Short Short
Interpersonal
Orientation Mostly task Task Social
Formality of
Structure Low High High
9

10. Uncertainty in the
Environment
 All of the forces discussed above
cause uncertainty for organizations.
 It becomes more difficult for managers
to control flow of resources to protect
and enlarge their domains.
10

11. Sources of Uncertainty in the
Organizational Environment
 Three factors causing uncertainty
1. Environmental complexity: the
strength, number, and
interconnectedness of the specific and
general forces that an organization has
to manage
2. Environmental dynamism: the
degree to which forces in the specific
and general environments change
quickly over time
11

12. Sources of Uncertainty in the
Organizational Environment
3. Environmental richness: the
amount of resources available to
support an organization’s domain
◦ Two reasons why environments may be
poor:
1) The organization is located in a poor
country or in a poor region of a country.
2) There is a high level of competition, and
organizations are fighting over available
resources.
12

13. Figure: Three Factors Causing
Uncertainty
13

14. Contingency Framework for Environmental
Uncertainty and Organizational Responses
Low Uncertainty
1. Mechanistic structure; formal,
centralized
2. Few departments
3. No integrating roles
4. Current operations orientation;
low speed response
High-Moderate Uncertainty
1. Organic structure, teamwork;
participative, decentralized
2. Few departments, much boundary
spanning
3. Few integrating roles
4. Planning orientation; fast
response
High Uncertainty
1. Organic structure, teamwork;
participative, decentralized
2. Many departments differentiated,
extensive boundary spanning
3. Many integrating roles
4. Extensive planning, forecasting;
high speed response
Low-Moderate Uncertainty
1. Mechanistic structure; formal,
centralized
2. Many departments, some boundary
spanning
3. Few integrating roles
4. Some planning; moderate speed
response
ENVIRONMENTAL
CHANGE
STABLE
ENVIRONMENTAL COMPLEXITY
UNSTABLE
SIMPLE COMPLEX

15. Resource Dependence
Theory
 Organizations are dependent on their
environment for their resources.
 Organizations attempt to manage their
transactions with the environment to
ensure access to resources.
 Organizations want access to their
resources to be predictable.
 The supply of the resources is
dependent upon complexity,
dynamism, and richness. 15

16. Resource Dependence
Theory
 This theory argues that the goal of an organization
is to minimize its dependence on other
organizations for the supply of scare resources in
its environment, and to find ways of influencing
them to make resources available for themselves.
 Strength of an organization dependence on
another for a resource is a function of two factors-
how vital the resource is and the extent to which
the resource is controlled by another organization
 Example:
 PC Industry Companies dependence on Intel for
memory chips and circuits
 Microsoft vs. adobe, Logitech and Netscape
16

17. Type of interdependence
 Symbiotic Interdependence: Exists between
organization and its suppliers, and
distributors like Compaq and Dell have it.
 Competitive Interdependence: Exists
among organizations that compete fro
scarce resources. Compaq, Dell, Hp and
Lenovo compete for customers and for
latest chips from Intel.
 Organizations use various linkage
mechanism for managing interdependence
17

18. Various linkage mechanism for
managing interdependence
18

19. Strategies for Managing Symbiotic
Resource Interdependencies
 Reputation: DeBeers uses trust to
manage its linkage with suppliers and
customers
 Co-optation: a strategy that manages
symbiotic interdependencies by neutralizing
problematic forces in the specific environment
◦ Examples: make outside stakeholders
(customers) inside stakeholders
◦ Interlocking directorate: a linkage that results
when a director from one company sits on the
board of another company
19

20. Organization Strategies for
Controlling the External
Environment
 Establishing
Interorganizational Linkages:
◦ Ownership
◦ Contracts, joint
ventures
◦ Cooptation, interlocking
directorates
◦ Executive recruitment
◦ Advertising, public
relations
 Controlling the
Environmental
Domain:
◦ Change of domain
◦ Political activity,
regulation
◦ Trade associations
◦ Illegitimate activities
20

21. Strategies for Managing Symbiotic
Resource Interdependencies
 Strategic alliances: an agreement
that commits two or more companies
to share their resources to develop
joint new business opportunities
21

22. Types of Strategic Alliances
 Long-term contracts
 Networks: a cluster of different organizations
whose actions are coordinated by contracts and
agreements rather than through a formal
hierarchy of authority
 Minority ownership
 Keiretsu- a group of organizations, each of
which owns shares in the other
organizations in the group, that work
together to further the group’s interests
22

23. Types of Strategic Alliances
 Joint venture: a strategic alliance among two or
more organizations that agree to jointly establish
and share the ownership of a new business
 Merger and takeover: results in resource
exchanges taking place within one organization
rather than between organizations
23

24. Figure : Types of Strategic
Alliances
24

25. Strategies for Managing
Competitive Resource
Interdependencies
 Collusion and cartels
◦ Collusion: a secret agreement among
competitors to share information for a
deceitful or illegal purpose
◦ Cartel: an association of firms that
explicitly agrees to coordinate their
activities
25

26. Strategies for Managing
Competitive Resource
Interdependencies
 Third-party linkage mechanism: a
regulatory body that allows
organizations to share information and
regulate the way they compete
 Strategic alliances: can be used to
manage both symbiotic and
competitive interdependencies
 Merger and takeover: the ultimate
method for managing problematic
interdependencies
26

27. Figure : Managing Competitive
Interdependencies
27

28. Transaction Cost Theory
 Transaction costs: the costs of
negotiating, monitoring, and governing
exchanges between people
 Transaction cost theory: States that
the goal of an organization is to
minimize the costs of exchanging
resources in the environment and the
costs of managing exchanges inside
the organization
28

29. Sources of Transaction Costs
 Environmental uncertainty and bounded rationality
◦ Bounded rationality: refers to the limited ability people
have to process information
 Opportunism and small numbers – attempt to
exploit forces or stakeholders
 Risk and specific assets: Specific assets: investments
that create value in one particular exchange relationship
but have no value in any other exchange relationship
29

30. Figure : Sources of Transaction
Costs
30

31. Transaction Costs are Low When
These Conditions Exist:
1. Organizations are exchanging
nonspecific goods and services.
2. Uncertainty is low.
3. There are many possible exchange
partners.
31

32. Transaction Costs Increase When
These Conditions Exist:
1. Organizations begin to exchange
more specific goods and services.
2. Uncertainty increases.
3. The number of possible exchange
partners falls.
32

33. Transaction Costs and Linkage
Mechanisms
 Bureaucratic costs
◦ According to transaction cost theory,
organizations will adopt increasingly
formal linkage mechanisms with their
exchange partners as transaction costs
increase.
◦ But these mechanism also carry
bureaucratic costs within the
organization.
33

34. Transaction Costs and Linkage
Mechanisms
 Transaction cost theory can be used
to choose an interorganizational
strategy.
 Managers can weigh the savings in
transaction costs of particular linkage
mechanisms against the bureaucratic
costs.
34

35. Transaction Costs and
Strategy
 Managers deciding which strategy to pursue must
take the following steps:
1. Locate the sources of transaction costs that may
affect an exchange relationship and decide how
high the transaction costs are likely to be
2. Estimate the transaction cost savings from using
different linkage mechanisms
3. Estimate the bureaucratic costs of operating the
linkage mechanism
4. Choose the linkage mechanism that gives the most
transaction cost savings at the lowest bureaucratic
cost
35

36. Keiretsu
 Mechanism for achieving the benefits
of formal linkages without incurring its
costs
◦ Example: Toyota has a minority ownership
in its suppliers.
◦ Substantial control over the exchange
relationship
◦ Avoid bureaucratic cost of ownership and
opportunism
36

37. Franchising
 A franchise is a business that is
authorized to sell a company’s
products in a certain area.
 The franchiser sells the right to use its
resources (name or operating system)
in return for a flat fee or share of
profits.
37

38. Outsourcing
 Moving a value creation that was
performed inside the organization to
outside companies
 Decision is prompted by the weighing
the bureaucratic costs of doing the
activity against the benefits.
◦ Increasingly, organizations are turning to
specialized companies to manage their
information processing needs.
38

39. Relationship Between Environmental
Characteristics and Organizational
Actions
39
Environmental
domain
(ten sectors)
High
complexity
Establishment of favorable linkages:
ownership, strategic alliances, cooptations,
interlocking directorates, executive recruitment,
advertising, and public relations
Organic structure and systems with low
formalization, decentralization,
and low standardization to enable
a high-speed response
Many departments and boundary roles
Greater differentiation and more
integrators for internal coordination
High
uncertainty
High rate
of change
Scarcity of
valued
resources
Resource
dependence Control of the environmental domain:
change of domain, political activity,
regulation, trade associations, and
illegitimate activities
Environment Organization