Chapter 2: The Organization and Its Environment

Introduction

Organizations are significant tools, which shape our modern society in various ways. They have to reach required resources, gain legitimacy, and find supporters in their environment to sustain their operations. Pioneers of management imagined organizations as machine like closed structure operating with maximum efficiency. This closed and highly rationalized system had a significant impact on the development of the first economic model and modern society.

The first scholars who made considerable contributions to modern business organization civilization ignored the human side of organizations, and they preferred to focus their efforts on defining an economic man. Despite the attempts to search for the human side of organizations, the closed system assumption had remained dominant until World War 2.

General systems theory and holism have gained popularity among organizational scholars in the post war period. Contingency theory can be denoted as the first comprehensive approach to relate organizations with their external environment. Contingency theorists were more interested in technical aspects of organizational environment, and they ignored societal influences.

Assessment of External Environment

There can be several factors in the external environment of an organization that require a detailed examination. Some of these factors are the ones organizations interact frequently, but the others may have indirect influences over organizations.

Traditionally organizational environment is defined as all elements exist outside the organizational boundaries, and an organizational domain is the chosen environmental field of action. Some sectors in the general environment are more and some sectors are less important in terms of goals and operations of organizations.

Task environment includes the sectors, which have a direct impact on organization’s ability to achieve its goal. Determination of the sectors that have priority should also be taken into account while dealing with structural arrangements in organizations.

Environmental Complexity

Environmental complexity is a measure of the number and the degree of dissimilarity of the factors surrounding an organization. It simply refers to the number of interactions of organizations with many sectors or elements within those sectors.

Organizations bound up with numerous contingencies when they face with complex environments. Organizations should have appropriate structure to cope with dissimilar elements. Organizations must be differentiated in terms of functional departments to interact with the elements in their environment more efficiently. In simple terms, organizations’ internal complexity increases as a result of external complexity.

Environmental Uncertainty

Environmental uncertainty is defined as a function of environmental complexity and speed of change. First, contingency researchers have focused on how the appropriate design should be for the organizations trying to survive in stable and unstable environments. Burns and Stalker conducted a research study on the silk and electronic production firms in England to determine their structural features. The findings of this study were so impressive that, the suggested model is still used in most of the textbooks explaining the theory and design of the organizations.

Principles of classical management are most fit with the organizations operating in a stable environment because achieving maximum efficiency is a prerequisite to survive. Learning and creativity become vital when organizations face with turbulent environments. Employees should feel themselves free and powerful to become innovative and creative. Management has to be tolerant towards faults and mistakes of employees to encourage them to learn.

Burns and Stalker’s model can also be applied to departments or units of an organization.

Adapting to Environmental Uncertainty

A horizontal and flexible structure best fits when organizations face with environmental uncertainty. However, adapting to an organic structure and flexible managerial approach may not be sufficient to cope with uncertainty. Organizations are not completely closed structures. Organizations are divided into three levels: institutional level, managerial level, and technical level.

System approach treats organizations as open systems and assumes that it is impossible for a closed system to survive. Institutional level should be open because its task is to relate organization with its broader context. However, technical level should be closed and organized rationally. Managerial level should act as a mediator between the other two levels. Technical system refers to the units, departments or parts in organizations where the main operations are carried on such as assembly line in a factory, software development units in an IT company and clinical units in a hospital- consultation rooms, operation theatres, radiology, and laboratories. Technical systems must be isolated from possible external effects to work properly. Closeness of the technical system is essential for efficiency in an organization.

Organizations establish buffer units or departments to control uncertainty and to protect their technical cores from external effects. The units which have boundary spanning roles 1) determine and bring information about changes in the environment into the organization and 2) send critical information to the context representing the organization.

Today, in some sectors, organizations prefer to design alternatives that are quite different from some of the fundamental organizing principles.

Robert Duncan, who is one of the important contingency theorists, suggested a more detailed framework to assess environments and to find the most appropriate design approach. He defined four types of environmental conditions with the combination of two variables – change and complexity - that were used to define uncertainty. These four dimensions are stable – simple, stable – complex, unstable – simple and unstable – complex.

Interorganizational Relations and Organizational Ecosystem

The models of contingency theory provide a basic insight for management practitioners, but they do not capture all the aspects of an organizational context. Modern firms in today’s economies have to access required resources, gain support of the society, and collaborate with each other to increase their level of competitiveness. Survival chances of organizations depend on their ability to persuade multiple stakeholders and interest groups about the necessity of their existence. Therefore, it is possible to state that external environment consists of a complex network of multiple types of relations among organizations, interest groups and critical actors.

Resource Dependency Perspective

Organizations have to access required resources from external environment to continue their operations.. Having proper internal operations is not so meaningful if an organization loses its access to the required resources. Most of the organizations depend on others in terms of resource acquisition, and survival of organizations is a function of their success to manage their dependency relations with others according to resource dependency theory. Resource dependency theory suggests that we should assess external environment as a complex network of dependency relations among organizations and other critical actors.

Population Ecology Perspective

Michael Hannan and John Freeman proposed a different perspective to examine competition and change in the external environment of organizations. Hannan and Freeman applied principles of evolutionary biology to explain the relation between inter-organizational dynamics and environment. Organizational form refers to formal structure, technology, normative order, goals and human resources. Population ecology theory tries to explain why there are diverse forms of organizations. Population means a group of organizations having the same structural characteristics which depend on same resources to survive and have similar outcomes. There are two perspectives about how evolution occurs in nature. Lamarck’s theory is based on adaptation of species to environmental changes by transfer of genetic codes. Darwin’s theory of natural selection is based on fitness of species to the external conditions determined by environment. Natural selection process eliminates the species which do not fit to the environmental conditions. Only the fit species can live in certain environmental condition. Therefore, diversity in the nature is closely related to diversity of environmental conditions. Michael Hannan and John Freeman used natural selection theory to explain population dynamics among organizations. Big and old organizations will lose their abilities for adaptation to external changes because of structural inertia according the population ecology theory. The term structural inertia means state of being indifferent to external changes.

The Population ecology theory indicates that organizations facing the same conditions to survive become more isomorphic-similar- to each other. The term niche refers to the habitat of organizations providing resources and needs for their survival. No two populations can continuously occupy the same niche according to the theory.

Institutional Perspective

Neo-institutional theory focuses on causes of similarity among organizational forms in the environment. Organizations not only use technical methods to compete but also try to gain recognition of important actors’ such as state, influential organizations and society. Even, a competition to gain legitimacy can be perceived as more important than technical competition in some cases. Institutional fields in the organizational environment are formed by an increase in the extent of interaction among organizations, emergence of coalitions and mutual awareness among participants in a set of organizations.

Organizations must adopt an appropriate form when they face with institutional forces and this process can lead to institutional isomorphism for the organizations trying to survive in the same context.

Organizational Networks

Social network theory emphasizes another important fact about external environment that may have direct impacts on the organizational performance and survival. Most of the approaches concerning business environment treat organizations as entities isolated from social motives and interactions. However, organizations need social support from the important actors in their environment just as an individual or a group of people. Having social ties with the key decision makers and the other organizations can enable flow of resources into an organization.