External Environment

Implications of the environment for organizational structure.

A more complex and uncertain the external environment, the more complex the internal structure of the organization ought to be (differentiation of internal structure). A stable external environment would lead an organization to have a formalized or hierarchical structure, whereas a dynamic environment would lead an organization to have a relatively organic structure. Greater complexity leads to greater need to differentiation. Greater differentiation leads to a need for greater internal integration of the constituent parts of the organization. Thus organizational effectiveness depends on the goodness of fit between the organizational form and the organizational environment characteristics.

Contingency Theory: Thompson (1967)

According to Thompson, a rational system, natural system or open system are suitable to different levels of the organization. E.g., at the technical level, the rational system is suitable, while the natural systems and open systems perspectives are most suitable at the managerial and institutional level of the organization.

How does change occur in the population of organizations according to population ecology?

Change within populations of organizations occurs not through managers' rational adaptation to the environment but through a process of selection. Although an organization starts with no analogues, organizations that survive have similar or common structure and forms. While large and old organizations become inert with respect to environmental changes, a new niche provides opportunities, resources and support for a birth of a new population. Most scholars focus on a single population or competing subpopulation. Little attention to cooperative or mutualistic processes.

Contingency Theory: Basic arguments?

Contributed to by Lawrence and Lorsch (1967), Thompson (1967) Assumes that all organizations are open systems. There is no single best organizational form. Environmental forces influence which organizational form would be most appropriate in a given situation. Based on organizational complexity and uncertainty, an organization may have a relatively mechanistic or an organic internal structure.

Constraining personnel systems

In the public sector, managers often face lack of discretion for extrinsic rewards. As a result, the relationship between performance and pay is likely to be weaker in public organizations relative to private organizations. Lack of discretion in hiring/firing may further reduce the incentive for public sector employees to go above and beyond with regard to their job performance. Public managers usually have weaker authority over subordinates and less discretion and flexibility in decision making.

What are the differences in public and private sector environments?

Lack of competitive markets More legal and political constraints and oversight Goal complexity and ambiguity Short tenure of top executives Constraining personnel systems

Short term tenure of top executives

Organizational change requires strong leadership. However, public organizations/bureaucracies are often led by political appointees or executives who lead the organization for a short time period. As a result of this temporal mismatch between the time horizons of career civil servants and political appointees, it is much harder to initiate and sustain change in public organizations.

What are the basic arguments of Transaction cost economics?

Pioneered by Williamson (1981). As opposed to contingency theory which focuses on a single organization, TCE takes a dyadic approach i.e., focuses on the interaction between two organizations and examines how that interaction affects the internal structure of each organization. This approach argues that organizational boundaries are determined by a firm's make or buy decisions. The make-or-buy decision in turn depends on the availability and prices of suppliers in the environments and the transaction costs of doing business with those suppliers.

Goal Complexity and Ambiguity

Political environments require public organizations to serve a variety of stakeholders at the same time. Since these stakeholders have variety of values and goals, public organizations often suffer from ambiguous and conflicting goals, which have the potential to disrupt organizational effectiveness. For example, public organizations are expected to have business-like characteristics such as efficiency and effectiveness while at the same time maintaining responsiveness, democratic accountability, legal standards, transparency etc. Different stakeholders espouse different values, and having to satisfy multiple needs creates ambiguity and complexity for public organizations. Greater goal ambiguity may also lessen employee motivation in the public sector.

Open Systems thinking

Since the early 1960s, scholars began studying the role of external environment in influencing the operations and characteristics of organizations, as part of the open systems perspective (Scott and Davis 2007). Organizations interact with other organizations, and other external stakeholders and depend on them for resources, support and legitimacy. The external environment also influences the structure of organizations, their interaction with external actors, and their strategies for change and survival.

Organizational Environment

The organizational environment consist of all elements, actors and resources outside the boundaries of an organization but have extensive influence on the workings of the organization.

Lack of competitive markets

The public sector environment does not have economic, competitive markets for its outputs and services. Thus, it is said that they do not have sufficient incentives to reduce costs and increase efficiency.

Perspectives on the external environment's influence

There are several perspectives that explain how and why organizations are impacted by their external environment. These perspectives include contingency theory, transaction cost economics, resource dependence theory, population ecology, new institutionalism etc.

Legal and political constraints and oversight

They have a variety of external stakeholders which include legislators, interest groups, the public/ordinary citizens, other agencies, corporations. The aforementioned stakeholders often seek to influence the management and decision making of public organizations. Public managers spend more time meetings with external stakeholders such as interest groups and governing boards (Mintzberg) *relative to private managers*

What are the weaknesses of Transaction cost economics approach?

This perspective does not take into account the potential power dynamics between organizations. Managers or decisions makers are not always self-interested. However, this approach only considers economic factors.

What are the basic arguments of Population Ecology?

This perspective was articulated by Hannan and Freeman (1977). *This perspective expands the interactions of organizational actors into the concept of organizational field.* According to population ecology, organizations go through a process of variation, selection and retention. The external environment selects winners and loser among populations. Organizations survive when they "fit" their environment and succeed at competing for resources; those that do not fit the environment lose out in the selection process and perish.

What the basic arguments of the Resource Dependency Theory?

This theory was articulated by Pfeffer and Salancik (1978). It argues that organizations try to acquire and maintain resources from the environment. By securing vital resources from the environments, organizations seeks power over other actors in their external environment, in order to increase the likelihood of their survival. Thus, organizations try to manipulate their external environment in order to establish power in their relationships with external stakeholders.

What are the main arguments of Neo-institutional Theory?

This theory was contributed to by Meyer and Rowan (1977) and DiMaggio and Powel (1983). According to this theory, organizations within the same organizational field experience isomorphic forces that lead them to become more and more similar to each other other in terms of structure, values, norms and culture. The institutional environment of organizations is filled with actors who promote and uphold certain ideas, values, and norms. Organizations gain legitimacy and improve chances for survival by incorporating these ideas, values, and norms, even if doing so proves to be costly and inefficient. Meyer and Rowan (1977): Organizational structure becomes isomorphic in response to the institutional environment, but it is not a "rational" process DiMaggio and Powel (1983): organizations become more and more similar by three isomorphic forces: coercive, mimetic, and normative. Even though these processes are costly and inefficient, organizations can gain legitimacy and support for survival. Downplays the significance of human agency as a source of change. Managers can opt to conform or not, but they have little discretion to choose how to structure or manage organizations.

Closed Systems Perspective

Up till the 1950s, organizations were viewed as closed systems that were sealed off from, and not interacting with their external environment. Under this perspective, there was an emphasis on 'scientific management' i.e., managing the internal operations of the organization in the 'one best way' possible. Under the scientific management movement, there were certain "principles" that guided management practice so that the organization would be designed and managed in the single best way. Scholars were focused on formal structure and characteristics (focus of rational systems school) or informal and social groups within organizations (focus of natural systems school).

Differences between the environments of public and private firms - Generic management perspective

While scholars have researched extensively on how the external environment affects organizations - there has been considerable debate about the differences between public and private firms. Scholars in the generic management tradition maintain that there is little difference between public and private organizations, and that viewing public and private organizations to be different is misleading, and could be harmful to understanding how organizations operate. Some theoretical and empirical findings indicate that there are more similarities than dissimilarities between public and private organizations, and that there are general principles that are applicable to both types of organizations. However, other scholars hold the perspective that there are substantial differences between public and private organizations in terms of their environment, internal structure as well as individual characteristics. In particular, the political environment of public organizations is the factor that makes public organizations distinct from private organizations, especially in terms of employee motivation, attitudes, performance and organizational change.