Chapter 5 External Environment

External Environment
Chapter 5
Dr. Rasim Serdar Kurdoğlu

MAN 361 Organization Theory
Bilkent University Faculty of Business Administration
The Environmental Domain
 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.
 It can be understood by analyzing its domain within

external sector.
• Domain: Territory that can affect or be affected
• Sector: A portion of the domain characterized by a
specific
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.
 It typically includes:
• The industry
• Raw materials sector
• Market sector
• Human resources sector
• International sector
General environment
 It includes sectors that might not have a direct impact on the daily operations of a
firm but will indirectly influence it.
 It typically includes:
• Government sector
• Sociocultural sector
• Economic conditions
• Technology sector
• Financial resources
International context
 Distinctions between foreign and domestic operations have become
increasingly irrelevant
 All organizations face domestic and global uncertainty
 The increasing interconnections represent both opportunities and
threats for organizations.
 Organizations are becoming extremely complex and competitive.
• Uncertainty: Decision-makers not having sufficient
information about environmental factors, and
consequently being unable to accurately predict external
changes.
• Uncertainty increases the risk of failure and makes
estimations difficult
• Changes in competition, consumer interests, innovative
technologies
• Disruptive innovations: Threatens leading firms in the
market
• Examples: Changes in music industry by ipod and later by
Spotify, changes in airlines industry
Dimensions of environmental uncertainty
 The dimensions of the environment range:
• Stable or unstable: The pace of change, dynamic vs. static
• Simple or complex: Heterogeneity and number of elements
• Whether available resources are concentrated or dispersed
• Degree of consensus in the environment
• Ergodicit: Nonergodic, i.e. past does not reflect future.
 Two essential ways the environmental changes influence organizations :
• The need for information about the environment
• The need for resources from the environment
Level of uncertainty
 The simple-complex and stable-unstable dimension are combined into
a framework for assessing uncertainty.
- Simple + Stable = Low Uncertainty
- Complex + Stable = Low-Moderate Uncertainty
- Simple + Unstable = High-Moderate Uncertainty
- Complex + Unstable = High Uncertainty
Adapting to Environmental Uncertainty
• Positions and departments to deal with complexity
• HR department deals with employees, finance department deals with banks
• Buffering: Departments absorbing shocks through stockpiling or
working with extra reserve agreements or product testing
• Boundary-spanning roles: Contact people who receive and send
information (e.g., market research teams, R&D engineers, business
intelligence departments)
• Differentiation and integration among departments: Specialization
and collaboration.
Controlling the external environment
 Organizational environment differs regarding uncertainty and
resource dependence.
 Organizations can adapt to uncertainty.
 Organization can also control their environment to if there

are resource dependencies
 When risk is great, organizations can attempt to change or

influence the environment.
Managing resource dependency
• Resource dependence means that organizations depend on the
environment but strive to acquire control over resources to
minimize their dependence.
• Organizations are vulnerable if vital resources are controlled by
other organizations, so there is an incentive to be as dominant
and independent as possible:
• Minimize vulnerabilities
• Will team up with others when resources are scarce and be
more competitive
• Maximize own autonomy and independence
Strategies for Controlling the External Environment
Establish Formal Relationship Controlling the domains
 Ownership: M &A  Change domain

 Formal strategic alliances (divestment or acquisition)
 Cooptation (industry leader  Political activity, regulation
transfer), interlocking (erect barriers)
directorates (board  Trade associations
member transfer from a  Illegitimate activities
competitor) (bribes, cartels, sabotaging,
 Executive recruitment wiretapping)
 Advertising and public
relations
Team discussion
1.What could be the relevant Task and General Environment

factors for Tadım Fırın and Fırıncı Orhan companies?
2.What is the level of simplicity-complexity for each firm?

What is the level of stability-unstability for each firm?
3.To which category would you put them in the Environmental

Uncertainty Framework?

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External Environment

Dr. Rasim Serdar Kurdoğlu

 It can be understood by analyzing its domain within

 Organizations can adapt to uncertainty.

 Organization can also control their environment to if there

 When risk is great, organizations can attempt to change or

 Ownership: M &A  Change domain

1.What could be the relevant Task and General Environment

2.What is the level of simplicity-complexity for each firm?

3.To which category would you put them in the Environmental

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