Topic 3 “Environment”

 The environment is everything outside the boundary of the

organizational unit of analysis. When you think about the
environment for a firm, think about what could have an
effect on the way the organization performs. It could be:
its customers, its competitors, its suppliers, the financial
market, or the political system. If your unit of analysis is a
department, then the other departments in the
organization are a part of its environment.

 The performance of the firm depends upon how a firm

makes the organization fit with the environment.
Organism

 Open systems theory can be defined as a theory of

organization that views organizations not as simple
“closed” bureaucratic structures separate from their
surroundings, but as highly complex entities, facing
considerable uncertainties in their operations and
constantly interacting with their environment.
 Among all of the descriptions, there are some common aspects in defining
the environment. First, they are general properties of an organization’s
environment, not a detailed listing of all of the elemental factors
themselves.

 Second, the measures are perceptions made by the management of the firm;
they are not necessarily objective. This does not mean they are inaccurate,
but that management creates its own understanding of the environment and
the implications for design.

 Third, whatever the particular environmental description used, the

environment is a large determinant of the organizational design, i.e., the
environmental imperative means that the environment is a major
determinant of how an organization should be designed.
 Increased uncertainty in the environment required increased
differentiation in the organizational structure in order for
the organization to be efficient. (Lawrence and Lorsch
(1967))

 The way you should define the environment is in terms of

what you know affects your organization. If a firm is a
monopolist, it does not have any relevant competitors.

 On the other hand, if a firm is in a very strong competitive

market, the most significant dimension in its environment
may be its competitors.
 The characterization of an organization’s environment in
terms of complexity and uncertainty is important and
relevant because an increase in both the complexity of
the environment and the uncertainty of the environment
increases the demand for information processing in the
organization. If there is a high degree of complexity, more
elements have to be monitored and the effect of change
has to be estimated. If there is a high degree of
uncertainty, more plans may have to be established and a
higher degree of flexibility may be needed.
Why firms behave different
 Cognitive capacity of the individuals in the firm that
allows one firm to understand the environment much
better than the other.

 It could be that the environmental scanning is done much

better in one company than in the other.

 The differences could be deliberate intentions of

management.
 Applying the complexity and unpredictability dimensions to
describe the environment, we get four types of environments: a
calm environment, a varied environment, a locally stormy
environment, and, finally, a turbulent environment.

 Generally, there are increased information-processing demands

on the organization as we move from a calm environment to a
turbulent environment. An organization has more issues to
consider and coordinate as the complexity and unpredictability
of the environment increase.
 If a firm is in a calm environment, then the environment is
low in complexity and is predictable. The firm has few factors
to consider and they are predictable; you know what is
important in the environment with a good deal of certainty.
There are no surprises and few adjustments are required.

 If a firm is in a varied environment, then the environment is

high in complexity but is predictable. There are many
interdependent factors, but these are well known and
predictable
 If a firm is in a locally stormy environment, then the environment is low
in complexity, but unpredictable.

 There are few and usually independent factors, but they are not
predictable.

 Unrelated surprises require many adjustments which can be dealt with

one by one.

 If a firm is in a turbulent environment, then the environment is high in

complexity and is unpredictable. There are many interdependent factors
which are unpredictable. This is the most demanding environment for
information processing, requiring many short-term and long term
adjustments and coordinated responses on the part of the organization.
Calm Environment
 A calm environment has low complexity and low
unpredictability (i.e., it is highly predictable).

 If a firm only has a few products and sells them into markets
where the markets are predictable, we say it has a calm
environment.

 Some public organizations think that they are in a calm

environment. But recent unforeseen budget cuts create
challenges to the assumed calm environment.
 Today’s environment will be tomorrow’s as well. There will be few
surprises. So, you can focus on other organizational design issues,
addressing more internal concerns.

 It is important to recognize the risks of an executive’s perception

of a calm environment.

 First, the executive’s perception can be wrong. Second, the

environment can change, and with an assumption of a calm
environment, it is likely that any change will be ignored or missed.

 So, the presumption of a calm environment by an executive is

potentially risky.
Varied environment
 The varied environment is complex as there are many factors to
take into consideration and they can be interdependent (i.e.,
they influence one another), but these factors are relatively
predictable and/or they tend to change within known limits.

 If a firm has many products and sells them into markets where
the markets are predictable, we say it has a varied environment.

 In such a varied environment there are many factors for an

organization to consider, but it is possible to predict what will
occur.
 Market forecasts, analysis of political trends (e.g., road
construction or environmental protection) are frequently
applied techniques to predict the future environment. It is
possible to project into the future with reasonable
accuracy and understanding.
 Locally stormy environment
 The locally stormy environment is highly unpredictable but not very
complex.

 That is, there are a few factors in the environment which are
relatively independent, but they are unpredictable.

 The locally stormy business environment is analogous to the

prediction of rain with a 0.5 probability for a farmer.

 The amount of rainfall may be one of the few factors that

determine a crop’s growth rate, but the predictability of rain may
be extremely low.
 Start-up companies that are dependent on a patent right or the
result of a particular outcome of a clinical trial are in locally stormy
environments.

 In the locally stormy environment, executives are most concerned

about the unpredictability of environmental factors that affect their
firm.

 The information processing capacity of the firm should be able to

adjust when unpredictable events occur. Unpredictability means that
the response time in which the firm has to react is much shorter than
if the environment were predictable.
 Unpredictability without complexity can be dealt with on
a local basis, not requiring the coordination for the whole
firm.
Turbulent environment
 The turbulent environment has both high complexity and high
unpredictability.

 There are many interdependent factors which are not predictable. This
environment is analogous to that faced by the farmer who has not only
the rain to consider but also the market price for grain, and the rain
and price may be correlated; further, both are difficult to predict.

 this is the most difficult environment in which to operate as it requires

limited forecasting and also the flexibility of quick and coordinated
adjustments as events become known.
 A turbulent environment requires a firm to have a large
and fast information-processing capacity so that the firm
can choose quickly among alternative courses of action for
the organization. Thus, the adjustments must be made
together and made quickly.
Fit and misfits

 book