CHAPTER

The
Environment
of
Organization
s and
Managers

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by Charlie Cook

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 Learning Objectives
After studying this chapter, you should be able to:


– Discuss the nature of the organizational environment and

identify the environments of interest to most
organizations.
– Describe the components of the general and task
environments and discuss their impact on
organizations.
– Identify the components of the internal environment and
discuss their impact on organizations.
– Identify and describe how the environment affects
organizations and how organizations adapt to their
environment.
– Discuss the meaning of and approaches to organizational
effectiveness.

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 Chapter Outline
• The Organization’s • Organizational-
Environments Environment
• The External Environment Relationships
– The General Environment – How Environments Affect
Organizations
– The Task Environment
– How Organization Adapt to
• The Internal Environment Their Environments
– Owners • The Environment and
– Board of Directors
Organizational
– Employees
– Physical Work
Effectiveness
Environment – Models of Organizational
Effectiveness
– Examples of Organizational
Effectiveness


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 The Business Environment
• External Environment
– General environment is everything outside an
organization’s boundaries—economic, legal, political,
socio-cultural, international, and technical forces.
– Task environment is composed of specific groups and
organizations that affect the firm.
• Internal Environment
– Conditions and forces present and at work within an
organization

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 The Organization and Its
Environments

International Technological
dimension dimension

Competitors

Regulators Owners Customers

Employees
Physical environment
Board of directors
Culture
Political-
Economic
legal
Strategic dimension
dimension Suppliers
partners

Sociocultural
Internal environment dimension

Task environment
External environment
General environment
Figure 3.1
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 The External Environment
• The General Environment
– The set of broad dimensions and forces in an
organization’s surroundings that create its overall
context.
– Economic dimension is the overall health and vitality of
the economic system in which the organization
operates.
– Technological dimension refers to the methods available
for converting resources into products or services.
– Sociocultural dimension includes the customs, mores,
values, and demographic characteristics of the society
in which the organization functions.
– Political-legal dimension is the extent of government
regulation of business and the general relationship
between business and government.
– International dimension is the extent to which the
organization is affected by business in other countries.
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McDonald’s General Environment

Technological
International Dimension Dimension
• Restaurants in 115 • Improved information
countries technology
• About two-thirds of • More efficient
sales from outside operating systems
the United
States

Political-Legal
Dimension McDonald’s Economic
• Government Dimension
food standards • Strong economic
• Local zoning growth
climate • Low unemploy-
• General posture ment
toward business • Low inflation
regulation
Sociocultural Dimension
• Demographic shifts in
number of single adults
and dual-income families
• Growing concerns about
Internal environment
health and nutrition
Task environment
External environment
General environment
Figure 3.2
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 The External Environment
(cont’d)
• Dimensions of the Task Environment
– Specific groups affecting the organization
• Competitors seeking the same resources as the organization.
• Customers who acquire an organization’s products or
resources.
• Suppliers that provide resources for the organization.
• Regulators that control, legislate, or influence the
organization’s policies or practices:

• Strategic partners (allies) who are in a joint venture or

partnership with the organization.

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 McDonald’s Task Environment

Competitors
• Burger King
• Wendy’s
• Subway
Regulators • Dairy Queen
• Food and Drug
Administration Customers
• Securities and • Individual
Exchange consumers
Commission • Institutional
• Environmental customers
McDonald’s
Protection
Agency

Suppliers
Strategic Partners • Coca-Cola
• Wal-Mart • Wholesale food
• Disney processors
• Foreign partners • Packaging
manufacturers

Internal environment
Task environment
Figure 3.3
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 The Internal Environment
• Conditions and stakeholder forces within an
organization
– Owners are persons with legal property rights to a
business.
– Board of directors are elected by the stockholders and are
charged with overseeing the general management of the
firm to ensure that it is run in a way that best serves the
stockholders’ interest.
– Employees are persons who work for the firm and have a
vested interest in its continued operation and existence.
– Physical work environment is the actual physical
environment of the organization and the work that
people do.

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 How Environments Affect
Organizations
• Change and Complexity
– Environmental change occurs in two ways:
•Degree to which change in environment is occurring
•Degree of homogeneity or complexity
of the environment
– Uncertainty is a driving force
that influences organizational
decisions.

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 Environmental Change, Complexity,
and Uncertainty
Simple

Least Moderate
uncertainty uncertainty
Homogeneity
Degree of

Moderate Most
uncertainty uncertainty

Complex
Stable Degree of Change Dynamic

Source: Adapted from J.D. Thompson, Organizations in Action. Copyright ©

1967 by McGraw-Hill. Reprinted by permission of McGraw-Hill Companies. Figure 3.4
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 How Environments Affect Organizations
(cont’d)


• Competitive Forces 

– Porter’s Five Competitive Forces

•Threat of new entrants into the market
•Competitive rivalry among present competitors
•Threat of substitute products
•Power of buyers
•Power of suppliers
• Environmental Turbulence
– Unexpected changes and upheavals in the
environment of an organization.

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 Porter’s Five Competitive Forces
• Threat of new entrants
– Extent to and ease with which competitors can enter
market.
• Competitive rivalry
– Competitive rivalry between firms in an industry.
• Threat of substitute products
– Extent to which alternative products/services may replace
the need for existing products/services.
• Power of buyers
– Extent to which buyers influence market rivals.
• Power of suppliers
– Extent to which suppliers influence market rivals.

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 How Organizations Respond to Their
Environments
General Environment

Task Environment

Information
management

Mergers, takeovers,
Social
acquisitions,
responsibility
alliances
The
Organization
Strategic Direct
response influence

Organization
design and
flexibility

Figure 3.5
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 How Organizations Respond to
Their Environments (cont’d)
• Information Management in Organizations
– A boundary spanner is an employee who accumulates
information through contacts outside the organization.
– Environmental scanning is the process of monitoring the
environment.
– Information systems summarize and deliver information in
a form pertinent to a manager’s needs.
• Strategic Response
– Maintaining the status quo, altering the current strategy,
or adopting a new strategy.
• Mergers, Acquisitions, Alliances
– Firms can combine (merge), purchase (acquisition), or
form new venture partnerships or alliances with another
firm.
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 How Organizations Respond to
Their Environments (cont’d)
• Organizational Design and Flexibility
– An organization may adapt to its environmental conditions
by incorporating flexibility in its structural design.
– Mechanistic firms operate best in stable environments.
– Organic firms are best suited for dynamic environments.
• Direct Influence of the Environment
– An organization may attempt to change the nature of the
competitive conditions in its environment to suit its
needs.
– Pursuing new or changed relationships with suppliers,
customers, and regulators can alter the organization’s
environment in a way that favors the organization.

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 The Environment and
Organizational Effectiveness
• Models of Organizational Effectiveness
– Systems resource approach focuses on acquiring inputs.
– Internal processes approach focuses on the
transformation processes (production efficiencies).
– Goal approach focuses on outputs (achieving
organizational goals).
– Strategic constituencies approach focuses on feedback
(satisfying stakeholders).

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 A Model of Organizational
Effectiveness
1 2 3
Acquiring the resources and combining them facilitates the attainment
needed from the in an efficient and of organizational goals…
environment… productive manner…
(Systems resource approach) (Internal processes approach) (Goal approach)

Transformation

Inputs Organizational Outputs

System

Feedback

5 4
and satisfies the
making it easier to
strategic constituents
acquire future
in the environment, . . .
resources.
(Strategic constituencies
(Combined approach)
approach)

Figure 3.6
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 Examples of Admired and
High-performing Firms

Fortune’s Most Admired Business Week’s Best

Companies (2000) Performing Companies (2000)

1. General Electric 1. Microsoft

2. Microsoft 2. Time Warner
3. Dell Computer 3. Cisco Systems
4. Cisco Systems 4. Oracle
5. Wal-Mart 5. EMC
6. Southwest Airlines 6. Citrix Systems
7. Berkshire Hathaway 7. Morgan Stanley Dean Witter
8. Intel 8. Gap
9. Home Depot 9. Warner-Lambert
10. Lucent Technologies 10. Lucent Technologies

Source: “America’s Most Admired Companies,” Fortune, February 21, 2000, pp. 108–
110; “The Business Week 50,” Business Week, March 27, 2000, pp. 123–125. Table 3.1
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