The Environment of Organizations

1. The Environment of Organizations eadarkoh

2. Introduction • Organization theorists conceptualized organizational environment as an entity that lies outside the boundaries of the organization. • The environment of an organization influences its outcome by imposing constraints and demanding adaptation as the price of survival. eadarkoh

3. Introduction • The organization sometimes faces uncertainties as it may not always be aware of what the environment demands from it. • The existence of the environment creates several dependencies. • The uncertainties and dependencies shape organizational structure and actions. eadarkoh

4. A simple distinction showing an organization and its environment ORG. eadarkoh

5. Introduction (cont’d) • Symbolic interpretivists, view the environment as a social construction. • - a theoretical construct formed by beliefs about the existence and constituted by expectation that are set in motion by such beliefs. eadarkoh

6. Defining the Organizational Environment • The modernists define organizational environment by three elements. These are: 1. The interorganizatonal network 2. The general network 3. International/global network eadarkoh

7. Interorganizational Network • Every organization interacts with other members of its environment. • The interactions are necessary for the organization to do the following: • Acquire raw materials, • Hire employees, • Secure capital, • Obtain knowledge, • Build new structures, and • Buy facilities and equipment. eadarkoh

8. Other environmental actors • Distributors, • Advertising agencies, • Trade associations,and • Governments in which businesses are conducted. eadarkoh

9. Inter-organizational Network • Inter-organizational network is a network of complex web of relationships in which a group of organizations is embedded. • The links in the network represent the channels through which resources, information, opportunities and influence flow. eadarkoh

10. Inter-organizational Network (cont’d) The inter-organizational network include the following: • Suppliers, • Customers, • Competitors, • Unions, • Regulatory agencies, • Special interests, etc. eadarkoh

11. Interorganizational Network-challenge • The main challenge in performing network analysis is the difficulty of determining a reasonable boundary of the organization. • The decision as to which actors to include and to exclude could be an arbitrary one. For most managers, the solution is to place their organization at the center and then establish the linkage with other organizations. eadarkoh

12. Interorganizational Network-challenge • This can lead to the problem of self-centeredness. • Management is likely to disregard vital information in the course of the analysis. • The solution is for management to slant the reporting of information towards its organization and top management. • Note that the network analysis is not always translated into organizational action plan. eadarkoh

13. General environment The concentration of the network analysis alone is likely to ignore certain vital actors in the environment. The general environment include the following: • The social sector-class structure, demographics, mobility pattern, life style, and traditional social institutions including, educational systems, religious practices, trades and professions etc. • Cultural sector-history, traditions, expectation of behaviour, values of the society. eadarkoh

14. General environment • The legal sector-constitutions and laws of the nation, legal practices such as corporate tax, and foreign investment law etc. • Political sector-terms and distribution and concentration of power and the nature of the political system-democratic or autocratic. eadarkoh

15. General environment • Economic sector- • labour markets, financial markets, markets for goods and services, the extent of partnership between public and private sector, consumption pattern, patterns of investment, banking system, inflation, interest rates, unemployment rates, access to raw materials, trade agreements, investment risk, hard currency issues, balance of payments etc. eadarkoh

16. General environment • Technological sector-knowledge and information of scientific development, purchase of equipment and software, services of consultants and other professionals, availability of computer-based technologies. • Physical sector- nature and natural resources, access to coal and oil, global warming, changing weather patterns, disappearance of rain forest and local disasters such as drought, earthquakes, floods, famines, and volcanic activities etc. eadarkoh

17. International/ Global environment This is the aspects of the environment that crosses national boundaries. It includes the following: • United Nations, • International Monetary Fund, • IBRD, • General Agreement on Trade and Tariffs (GATT), • WTO, • EPAs etc. The effect of globalization- competition from outside etc. As soon as an organization begins to expand its operations beyond its national borders, it will interact with international actors such as venture partners, consumer groups, tariff collecting agencies, tax authorities licensing agents. eadarkoh

18. Theories of Organization-Environment Relations • There have been two periods of intense development of organization-environment relationships. 1. Late 1950s and early 1960s- this is when the concept of the environment was first introduced to organizational analysis. It was largely an extension of the systems theory. Before this development, organizations were treated as though they were closed systems, management was concerned about the internal operations. The introduction of systems theory established organizations as open systems and therefore impacted upon by their environment. eadarkoh

19. Theories of Organization-Environment Relations (cont’d) • The first period was devoted to conceptualizing the environment and demonstrate the importance of the environment. 2. The second period of the development started in the late 1970s and continues today. • Under this the environment is assumed to be influential, and considerable attention is focused on ways in which this influence operates. • We will examine an example of contingency theory that relates the environment to mechanistic and organic styles of organization (representing the first period). • We will examine resource dependency theory (representing the second period). eadarkoh

20. Contingency Theory: Mechanistic and Organic Organizations • Organizations differ considerably depending upon whether they operate in a stable or rapidly changing environments. • In stable environments, organizations specialize in routine activities with well defined lines of authority and responsibility. • Using the metaphor of a machine, these organizations are called mechanistic organizations. Examples, university libraries, post offices, telephone companies etc. eadarkoh

21. Contingency Theory: Mechanistic and Organic Organizations (cont’d) • Machines are made up of parts which interact to perform specific tasks. • Mechanistic organizations therefore have different parts with specific specializations (different tasks and jobs that employees do). • These separate parts are engineered into a high- performing system by management. eadarkoh

22. Contingency theory: Mechanistic and Organic Organizations (cont’d) • In a rapidly changing environment, however, organizations require flexibility and employees are encouraged to apply their skills as needed and must be prepared to fit into the changing work patterns. • Modern organization theorists describe these organizations as organic, examples; hospital emergency rooms, research laboratories etc. • Note that most administrative work in the university is done in mechanistic way while research activities are more organic • These organizations are like living things and therefore adapt flexibility to changing circumstances. eadarkoh

23. Features of organic organizations Organic organizations have the following features: • less specialization, • less formalized and hierarchical than mechanistic organizations, and • They have lateral communication. eadarkoh

24. General comments on contingency theory • Within each organization there are both mechanistic and organic components. • The distinction is, however, important in order to characterize the central tendencies of different styles of organizations that appear in two extreme types of environment. • It is wrong to conclude that one type of organization is superior to the other-each is appropriate to different environmental condition. eadarkoh

25. General comments on contingency theory • In stable environments, the mechanistic form is advantageous- the use of standard procedure generate efficiency- the organization can minimize cost and maximize profit. • Under rapidly changing environment, the use of mechanistic model will be a disaster because most of the advantages of this model organization are lost. • The logic of profitability of routinization breaks down because the organization will have to adjust its activities to suit changing conditions. • The flexibility that is associated with organic organization is suitable for constantly changing environment. eadarkoh

26. Contributions of contingency Theory Tom Burns and George Stalker contributed phenomenally to the growth of this theory. Their major contributions include the following: • That different environmental conditions required different styles of organizations. They argued that the most effective way to organize is contingent upon conditions of complexity and changes that take place in the environment. • In recent years, we accept the importance of the environment without question. However, in their time, the theory of mechanistic versus organic organizational forms was insightful and ground-breaking. • It continues to offer a foundation for recent discussions of organization-environment relations . eadarkoh

27. Resource Dependency Theory • This theory was fully developed by Jeffrey Pfeffer and Gerald Salancik who published their ideas in 1978. • They titled the book The External Control of Organizations to emphasize the importance of the environment to the survival of organizations. • This theory is based on the assumption that organizations are controlled by their environment. • The theory also contends that managers can learn to navigate the harsh seas of environmental domination. eadarkoh

28. Resource Dependency Theory (cont’d) • The basic argument of RDT is that an analysis of inter-organizational relations within the network of the organization can help manager to understand the power/dependency relationships that exist between their organizations and other network actors. • When managers are equipped with this knowledge, they can anticipate likely sources of influence from the environment and suggest ways to offset them- (through the creation of counter-dependence). eadarkoh

29. Resource Dependency Theory (cont’d) Organization’s vulnerability to its environment is due to the need for the following: • Raw materials, • Labour, • Equipment, • Knowledge, • Outlets for its products, and • Meeting the standards set by regulatory agencies. The dependency these need produce give the environment its power eadarkoh

30. Resource Dependency Theory (cont’d The environment uses this power to make demands on the organization for such this as: • Competitive prices • Desirable products and services • Efficient organizational structure and processes The dependence the organization has is not one single, undifferentiated dependency, it is complex set of dependencies. eadarkoh

31. Resource Dependency Theory (cont’d • 1. Resource dependency theory starts by identifying an organization’s needed resources and then tracing them to their sources. • The use of the open system analysis to identify the sources of resources. • This system helps one to identify resource inputs and the output of the organization. • You can use the network model to identify where the resources are located. eadarkoh

32. Resource Dependency Theory (cont’d • Focus attention on those environmental actors who can affect these organization-environment relationships. In practice it is difficult to consider every source of dependence that the organization has on its environment or every potential competitive or regulatory move. The solution is to sort resources according to their criticality and scarcity. eadarkoh

33. Managing Dependencies Managing dependencies requires the establishment of countervailing power with respect to the particular environmental elements on which the organization’s dependence rests. This means: • You must thoroughly understand the network with regards to criticality and scarcity. • Seek ways to avoid the dependency or make other environmental actors dependence on the organization. eadarkoh

34. Managing Dependencies(cont’d) • In the area of supply of raw materials, establish multiple sources of supply- where it is not easy to change a supply, contracting is the preferred method. • Merger strategies can be considered. • Development of personal relationships with members of the firm on which yours depend. • Establishment of formal ties such as taking membership of their board of directors or inviting one of their members to sit on your board. • In managing regulatory agencies, send lobbyists to influence legislation (this is very rare in Ghana). eadarkoh

35. Managing dependencies(cont’d) • Labour and knowledge dependencies are managed with recruitment strategies for attracting executives and other personnel away from your competitors. • Formation of trade associations will help deal with competitors and regulators. • If all the above strategies fail, the organization can change its environment-the organization can enter or exit a line of business, alter its products/service mix through diversification or retrenchment ( joint venture, mergers, acquisition etc. eadarkoh

36. Conclusion • Note that these strategies merely alter the dependence picture, they do not eliminate the need to manage resource dependence. • Managing resource dependence requires careful definition and monitoring of the environment. • It also calls for imagination with respect to balancing the power of others by developing the power of your own organization. eadarkoh