Chapter Four: Open Systems Design Elements

4.1 The External Environment

Organizational environment is defined as all elements that exist outside the boundary of the organization and
have the potential to affect all or part of the organization.
Domain is the chosen environment field of action. It defines the organization’s niche and those external sectors
with which the organization will interact to accomplish its goals.
Sector means subdivision of the external environment that contain similar elements. For each organization, there
are ten sectors.
Organize elements in the external environment into ten sectors for analysis:

a) Industry: Competitors, industry size and competitiveness, related industries;

b) Raw materials: Suppliers, manufacturers, real estate, services;
c) Human resources: Labor market, employment agencies, universities, training schools, employees in other
companies, unionization;
d) Financial resources: Stock markets, banks, savings and loans, private investors;
e) Market: Customers, clients, potential users of products and services;
f) Technology: Techniques of production, science, computers, information technology, e-commerce;
g) Economic conditions: Recession, unemployment rate, inflation rate, rate of investment, economics, growth;
h) Government: City, state, federal laws and regulations, taxes, services, court system, political processes;
i) Socio-Cultural: Age, values, beliefs, education, religion, work ethics, consumer and green movements;

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j) International: Competition from and acquisition by foreign firms, entry into overseas markets, foreign customs,
regulations, exchange rate.
Classifications of sectors
Focus on sectors that may experience significant change at any time.
Task Environment: Includes sectors with which the organization interacts directly and that have a direct impact
on the organization’s ability to achieve its goals. Task environment typically includes the industry, raw materials
and market sectors, and perhaps the human resources and international sectors.
General Environment: Includes those sectors that might not have a direct impact on daily operations of a firm
but will indirectly influence them. General environment often includes the government, socio-cultural, economic
conditions, technology and financial resources sectors. These sectors affect all organizations eventually.
International Environment
International Context: Growing importance from the international sector. The environment for all organizations
is becoming extremely complex and competitive.
The Changing Environment
Environmental Uncertainty: Several dimensions like stable/unstable, homogeneous/heterogeneous,
Simple/complex, the amount of resources available etc. These dimensions come together in two essential ways
the environment influences organizations: need for information about environment and need for resources from
the environment.
Uncertainty: When decision makers don’t have sufficient information about the environmental factors and have
a difficult time predicting environmental factors.
Simple-Complex Dimension: Concerns environmental complexity, which refers to heterogeneity, or the number
and dissimilarity of external elements relevant to an organization’s operations.
Complex environment: organization is influenced by numerous diverse external elements. Simple
environment: organization interacts with/ is influenced by only a few similar external components.
Stable-Unstable Dimension: Refers to whether elements in the environment are dynamic. Environmental
domains seem to be increasingly unstable for most organizations. Although environments are more unstable
today, an example of a traditionally stable environment is a public utility such as a provider of a water, gas or
electricity.
Stable environment: If it remains the same over a period of months or a year.
Unstable environment: Environmental elements shift abruptly. May occur when competitors react with
aggressive moves.
Framework
The simple–complex and stable–unstable dimensions are combined into a framework for assessing
environmental uncertainty. In the simple, stable environment, uncertainty is low. There are only a few external

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elements to contend with, and they tend to remain stable. The complex, stable environment represents somewhat
greater uncertainty. A large number of elements have to be scanned, analyzed, and acted upon for the
organization to perform well. External elements do not change rapidly or unexpectedly in this environment. Even
greater uncertainty is felt in the simple, unstable environment. Rapid change creates uncertainty for managers.
Even though the organization has few external elements, those elements are hard to predict, and they react
unexpectedly to organizational initiatives. The greatest uncertainty for an organization occurs in the complex,
unstable environment. A large number of elements impinge upon the organization, and they shift frequently or
react strongly to organizational initiatives. When several sectors change simultaneously, the environment
becomes turbulent.

Adapting to Environmental Uncertainty

Aspects of organizations that differ as the uncertainty increases:
1) Adding Positions and Departments: As the complexity and uncertainty increases, so do the number of
positions and departments in the organization. This increases internal complexity.
2) Buffering and Boundary Spanning: when environmental uncertainty increases, traditionally, buffer
departments were established. More recently, organizations drop buffers because they believe being well
connected to customers and suppliers is more important than internal efficiency. Opening up the organization
makes it more fluid and adaptable. Boundary-spanning roles are introduced.
Buffering Roles: Purpose is to absorb uncertainty from the environment. They support the technical core and
exchange materials, resources and money between the environment and the organization.
Boundary Spanning Roles: Link and coordinate an organization with key elements in the external environment.
Purpose of boundary spanning is the exchange of information to:
a. Detect and bring into the organization information about changes in the environment;
b. Send information into the environment that presents the organization in a favorable light. Boundary spanners
prevent the organization from stagnating by keeping top managers informed about environmental changes.

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Business Intelligence: It is an approach to boundary spanning. It refers to the high-tech analysis of large
amounts of internal and external data to spot patterns and relationships that might be significant. BI is related to
another important area of boundary spanning, known as competitive intelligence. This gives top executives a
systematic way to collect and analyze public information about rivals and use it to make better decisions. Use of
internet, digging trash cans etc.
3) Differentiation and Integration: When the external environment is complex and rapidly changing,
organizational departments become highly specialized to handle the uncertainty in their external sector. One
outcome of high differentiation is that coordination among departments becomes difficult. With uncertainty,
frequent changes require more information processing to achieve horizontal coordination so integrators become a
necessary addition to the organization structure.
Differentiation it is the differences in cognitive and emotional orientations among managers in different
functional departments, and the difference in formal structure among these departments.
Integration means quality of collaboration among departments.
4) Planning, Forecasting and Responsiveness:The point of increasing internal integration and shifting to more
organic processes is to enhance the organization’s ability to quickly respond to sudden changes.
Planning and forecasting become more important. When the environment is stable, organizations can concentrate
on current problems and day-to-day efficiency. Long-range planning and forecasting are not needed because
environmental demands will stay the same.Organizations that have unstable environments often establish a
separate planning department. Planning can not substitute for other actions!! (boundary spanning, integration etc)
5) Organic vs. Mechanistic Management Processes: when the external environment is stable, the internal
organization is characterized by rules, procedures and a clear hierarchy of authority, which is called mechanistic
organization. In rapidly changing environments, the internal organization is much looser, free-flowing and
adaptive. The hierarchy of authority is not clear and rules and regulations are often not written down, this is
known as organic organization.

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Mechanistic Organization Systems: Formalized, centralized organizations. Most decisions are made at the top.
Common system for a stable environment.
Organic Organization Systems: Organizations where the decision-making authority is decentralized. Common
system for an unstable environment with a lot of uncertainty. The organization is more fluid and able to adapt
continually. Organic are: learning organization, horizontal and virtual network structure.
Framework for Organizational Responses to Uncertainty

Dependence On External Resources

Resource Dependence: Means that organizations depend on the environment but strive to acquire control over
resources to minimize their dependence. Third (what are one and two?) characteristic of the organization-
environment relationship. Companies want to reduce vulnerability with respect to resources by developing links
with other organizations, but they also like to maximize their own autonomy and independence. Dependence on
shared resources gives power to other organizations.
Controlling Environmental Resources

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Organizations try to maintain a balance between linkages with other organizations and their own dependence.
They try to maintain this balance through attempts to modify, manipulate or control other organizations. There
are two strategies to manage resources:
a. Establish favorable linkages with key elements in the environment;
b. Shape the environment domain.

Establish Interorganizational Linkages

Ownership: When a company buys a part of or a controlling interest in another company, this gives the
company access to technology, products or other resources. Acquisition: involves the purchase of one
organization by another so that the buyer assumes control. Merger: is the unification of two or more
organizations into a single unit.
Formal Strategic Alliances: When there is a high level of complimentarily between the business lines,
geographical positions, or skills of two companies, the firms often go the route of a strategic alliance rather than
ownerships through merger or acquisition. Contracts: license agreements (1) that involve the purchase of the
right to use an asset for a specific time or supplier arrangements (2) that contract for the sale of one firm’s output
to another. Joint ventures: creation of a new organization that is formally independent of the parents, although
the parents will have some control. Sharing of risks and costs with large projects or innovations.
Cooptation, Interlocking Directorates: Cooptation: when leaders from important sectors in the environment
are made part of an organization (board of directors). Interlocking directorate: formal linkage that occurs when a
member of the board of directors of one company sits on the board of directors of another company (can
influence policies and decisions). Direct interlock = this person is the direct link between two companies.
Indirect interlock = When director of company A and B are both in the board of directors from company C.
Executive Recruitment: Transferring or exchanging executives.
Advertising and Public Relations: Traditional way of establishing favorable relationships is through
advertising. Organizations spend large amounts of money to influence the tastes and opinions of consumers.
Advertising is especially important in highly competitive industries and in industries that experience variable
demand. Public relations is similar to advertising, except that stories often are free and aimed at public opinion.
Public relations people cast an organization in a favorable light in speeches, on websites, in press reports, and on
television. Public relations attempts to shape the company’s image in the minds of customers, suppliers, and
government officials.
Controlling the Environmental Domain

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Change of Domain: An organization may try to find a domain where there is little competition, no government
regulation, abundant suppliers, affluent customers, and barriers to keep competitors out. Acquisition: deals with
company’s in other domains.
Political Activity, Regulation: Techniques to influence government legislation and regulation, like lobbyists
and working with other organizations, also lobbying by CEO.
Trade Associations: Accomplished jointly with other organizations that have similar interests.
Illegitimate Activities: Certain conditions (low profits, pressure from senior managers, scarce environmental
resources etc) may lead managers to adopt illegitimate behavior.
Organization-Environment Integrative Framework
Two major themes about organization–environment relationships discussed in this chapter. One theme is that the
amount of complexity and change in an organization’s domain influences the need for information and hence the
uncertainty felt within an organization. Greater information uncertainty is resolved through greater structural
flexibility and the assignment of additional departments and boundary roles. When uncertainty is low,
management structures can be more mechanistic, and the number of departments and boundary roles can be
fewer. The second theme pertains to the scarcity of material and financial resources. The more dependent an
organization is on other organizations for those resources, the more important it is to either establish favorable
linkages with those organizations or control entry into the domain. If dependence on external resources is low,
the organization can maintain autonomy and does not need to establish linkages or control the external domain.