Chapter IV

CHAPTER 4
Open Systems Design Elements

OUTLINES
The external environment.
Inter-organizational Relationships.
Organization size and life cycle

The external environment
organizational environment
In a broad sense the environment is infinite and
includes everything outside the organization.
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
The environment of an organization can be understood by

analyzing its domain within external sectors.
Domain defines the organization’s niche and defines those external
sectors with which the organization will interact to accomplish its
goals
Ten sectors can be analyzed for each organization:

industry, raw materials, human resources, financial
resources, market, technology, economic
conditions, government, sociocultural, and
international.
Sectors can be further subdivided into the task
environment and general environment.
Task Environment
It includes sectors with which the organization interacts
directly and that have a direct impact on the organization’s
ability to achieve its goals.
The task environment typically includes the industry, raw
materials, and market sectors, and perhaps the human
resources and international sectors.
General Environment
It includes those sectors that might not have a
direct impact on the daily operations of a firm but
will indirectly influence it.
The general environment often includes the
government, sociocultural, economic conditions,
technology, and financial resources sectors.
 International Environment
 The international sector can directly affect many
organizations, and it has become extremely
important in the last few years.
 In addition, international events can influence all
domestic sectors of the environment as well.
Inter-organizational Relationships
Organizational Ecosystems
Inter-organizational relationships are the relatively
enduring resource transactions, flows, and linkages
that occur among two or more organizations.
An organizational ecosystem is a system formed by

the interaction of a community of organizations and
their environment.
Today, successful companies develop relationships with
numerous other organizations cutting across traditional
business boundaries.
Is Competition Dead?
No company can go it alone under a constant onslaught of
international competitors, changing technology, and new
regulations.
Organizations around the world are embedded in complex
networks of confusing relationships; collaborating in some
markets, competing fiercely in others.
The Changing Role of Management
Within business ecosystems managers learn to
move beyond traditional responsibilities of
corporate strategy and designing hierarchical
structures and control systems.
If a top manager looks down to enforce order and

uniformity, the company is missing opportunities for
new and evolving external relationships
In this new world, managers think about horizontal
processes rather than vertical structures
Managers in charge of coordinating with other companies

have to learn new executive skill
Inter-organizational Framework
Appreciating the larger organizational ecosystem is
one of the most exciting areas of organization
theory.
The models and perspectives for understanding
inter-organizational relationships ultimately help
managers change their role from top-down
management to horizontal management across
organizations
Relationships among organizations can be
characterized by whether the organizations are
dissimilar or similar and whether relationships are
competitive or cooperative
Resource Dependency
Resource dependence represents the traditional view of
relationships among organizations.
Resource-dependence theory argues that organizations try
to minimize their dependence on other organizations for
the supply of important resources and try to influence the
environment to make resources available.
Organizations succeed by striving for independence and
autonomy
Supply Chain Relationships
To meet customers’ needs, an organization must have
reliable deliveries of high-quality, reasonably priced
supplies and materials.
Many organizations develop close relationships with key
suppliers to gain control over necessary resources.
Supply chain management refers to managing the sequence
of suppliers and purchasers, covering all stages of
processing from obtaining raw materials to distributing
finished goods to consumers
Organization size and life cycle and design/structure
 Organization size
The question of big versus small begins with the

notion of growth and the reasons so many
organizations feel the need to grow large
Pressures for Growth

Large size enables companies to take risks that could
ruin smaller firms, and scale is crucial to economic
health in some industries
Differences between Large and Small Organizations
Large Small
Responsive, flexible
Economies of scale Regional reach
Global reach Flat structure, organic
Vertical hierarchy, mechanistic Simple
Complex Stable market Niche finding
“Organization men Entrepreneurs
 Organizational Life Cycle
A useful way to think about organizational growth
and change is the concept of an organizational life
cycle, which suggests that organizations are born,
grow older, and eventually die.
Organization structure, leadership style, and
administrative systems follow a fairly predictable
pattern through stages in the life cycle.
Stages are sequential and follow a natural
progression.
 Stages of Life Cycle Development
1. Entrepreneurial stage
 When an organization is born, the emphasis is on creating a product
or service and surviving in the marketplace.
 The founders are entrepreneurs, and they devote their full energies
to the technical activities of production and marketing.
 The organization is informal and no bureaucratic.
 The hours of work are long.
 Control is based on the owners’ personal supervision.
 Growth is from a creative new product or service.
 Crisis: Need for leadership
2. Collectivity stage
If the leadership crisis is resolved, strong leadership
is obtained and the organization begins to develop
clear goals and direction.
Departments are established along with a hierarchy

of authority, job assignments, and a beginning
division of labour
In the collectivity stage, employees identify with the
mission of the organization and spend long hours
helping the organization succeed.
Members feel part of a collective.
Communication and control are mostly informal

although a few formal systems begin to appear
Crisis: Need for delegation.
If the new management has been successful, lower-
level employees gradually find themselves restricted
by the strong top down leadership.
Lower-level managers begin to acquire confidence

in their own functional areas and want more
discretion
3. Formalization stage
The formalization stage involves the installation and
use of rules, procedures, and control systems.
Communication is less frequent and more formal.
Top management becomes concerned with issues

such as strategy and planning and leaves the
operations of the firm to middle management.
 Product groups or other decentralized units may be
formed to improve coordination.
 Incentive systems based on profits may be
implemented to ensure that managers work
toward what is best for the overall company.
 When effective, the new coordination and control
systems enable the organization to continue
growing by establishing linkage mechanisms
between top management and field units.
Crisis: Too much red tape
At this point in the organization’s development, the

proliferation of systems and programs may begin to
strangle middle-level executives.
 The organization seems bureaucratized.

 Innovation may be restricted.
 The organization seems too large and complex to be
managed through formal programs
4. Elaboration stage
The solution to the red tape crisis is a new sense of
collaboration and teamwork.
Throughout the organization, managers develop
skills for confronting problems and working
together.
Bureaucracy may have reached its limit
Social control and self-discipline reduce the need for

additional formal controls.
Managers learn to work within the bureaucracy
without adding to it.
 Formal systems may be simplified and replaced by
manager teams and task forces.
To achieve collaboration, teams are often formed
across functions or divisions of the company.
The organization may also be split into multiple
divisions to maintain a small-company philosophy
 Crisis: Need for revitalization.
After the organization reaches maturity, it may enter

periods of temporary decline.
A need for renewal may occur every ten to twenty years.
The organization shifts out of alignment with the

environment or perhaps becomes slow moving and over
bureaucratized
Top managers are often replaced during this period

Organizational Characteristics during the Life Cycle
 Entrepreneurial
Characteristic Non-bureaucratic
Structure Informal, one-person show
Products or services
Single product
Reward and control system Personal, paternalistic
Innovation
By owner-manager
Goal Survival
Individualistic, entrepreneurial
Top management style
Collectivity
Characteristic Pre-bureaucratic
Structure Mostly informal, some procedures
Products or services Major product or service, with variations
Reward and control system Personal, contribution to success

Innovation By employees and managers
Goal Growth
Top management style Charismatic, direction-giving

Formalization
Characteristic Bureaucratic
Formal procedures, division of labor, new
Structure specialties added
Products or services Line of products or services
Reward and control system
Impersonal, formalized systems
Innovation By separate innovation group
Goal Internal stability, market expansion
Top management style Delegation with Team approach

Elaboration
Characteristic Very Bureaucratic
Teamwork within bureaucracy, small-
Structure company thinking
Products or services Multiple product or service lines
Reward and control system Extensive, tailored to product and

department
Innovation By institutionalized R&D

department
Goal Reputation, complete organization
Top management style Team approach, attack bureaucracy

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CHAPTER 4

Open Systems Design Elements

Organization size and life cycle

The environment of an organization can be understood by

Ten sectors can be analyzed for each organization:

An organizational ecosystem is a system formed by

If a top manager looks down to enforce order and

Managers in charge of coordinating with other companies

The question of big versus small begins with the

Pressures for Growth

Departments are established along with a hierarchy

Communication and control are mostly informal

Lower-level managers begin to acquire confidence

Top management becomes concerned with issues

At this point in the organization’s development, the

 The organization seems bureaucratized.

Social control and self-discipline reduce the need for

After the organization reaches maturity, it may enter

The organization shifts out of alignment with the

Top managers are often replaced during this period

Products or services Major product or service, with variations

Reward and control system Personal, contribution to success

Top management style Charismatic, direction-giving

Goal Internal stability, market expansion

Top management style Delegation with Team approach

Products or services Multiple product or service lines

Reward and control system Extensive, tailored to product and

Innovation By institutionalized R&D

Goal Reputation, complete organization

Top management style Team approach, attack bureaucracy

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