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Hawley (1950) said that all organizations have engaged in activities which have adjustment to the environment. Duncan (1971) emphasized that organization must adapt to their environment in order for them to be existed. Then Pfeffer and Salancik (1978) have concluded that: "organizations are inescapably bound up with the conditions of their environment". Handel (2003) noted the environment in which the organization operate generated excess uncertainty about what must be done, the necessity that something must be done, and main consequences of whatever is done. Then what is environment of an organization? And why these factors have so much influence on organizations?
The idea of environment context of an organization has been studied from early of the XIX century however the specific concept of organization environment and its components had not been formed yet till the late of the XIX century (Duncan, 1972). There were many fail attempt throughout the way. Pugh et al. (1969) had studied organizational contexts where the settings of organization structure are developed. However, it was not a model of an organization in an environment. Lawrence and Lorsch (1967) has considered environment as a total entity in their studied but they only looked at the environment from the organization outward. Till 1972 analysis, Duncan then finally concluded that environment was the totality physical and social factors that were taken directly into consideration in the decision-making behavior of individuals in the organization. With this definition we could identify that factors within the boundaries of the organization must be considered as part of the environment and therefore differentiate the environment into internal and external environment.
Types of environment
The organization environment is segmented as below:
Source: Kuratko (2001)
The internal environment consists of those relevant physical and social factors within the boundaries of the organization.
It is how an organization could achieve the final goal. It demonstrates an appropriate pathway, instruction to the whole system. The strategy included all parts of the organization, from people, financial aspects, market factors, product characteristic, etc.
Organizational culture, values
This is the factor that shapes up the view of an organization about ethics and determines various important issues. It varied depends upon each organization, nation, area, religious, and belief of the organization. Handel (2003) consider high output does not depend much on technical conditions, such as physical features of the working environment, human physical capacities, or economic incentives, but on social conditions and organizational climate.
Structures and systems
This factor is the formal organizing principles that enable collaboration and guide behavior. It should be suitable and effective to achieve the organizational goals. It creates a chain of responsibility that affects the whole organization and demonstrates the management style. Also, this is the factor that identifies the chain of communication. Burns and Stalker (1960) studied British firms in the textiles, heavy industry, electronics industries, and found out that firm structure varied depending on whether the firm operated in a stable or fast changing environment.
Metrics and incentives
This factor is the formal measure that drives the behavior of individuals, teams and departments within the organization. It defines the promotion, advancement opportunities to motivate employees. Handel (2003) mentioned that the Human Relations researchers exaggerated worker happiness in the experimental groups and minimized the conflicts between management and labor.
Technology and methods
This factor is the capability that providing and delivering value. It help organization to achieve the final goal easier, quicker. The organization should provide employees with appropriate training so that they can make good use of these factors and generate the best value. Woodward (1982) examined the effect of different production technologies on organizational structure among manufacturing establishments. She found out that plants using mass production technology were more bureaucratized than those using small set technologies however, plants using continuous process technology tended to have more crude structure, and their production jobs contain more responsibility and were more skilled.
This factor is the skill sets and mindsets of individuals that work together to achieve common goals, including employees, partners, suppliers, etc. Making good use of the employees would lead the organization to great success cause putting right people in the right job would generate the best productivity. Also appropriate training and development of the human perspective would improve the performance of the whole organization remarkably.
Activities, tasks, processes
This factor is how strategies are executes and how work is done. It should be controlled closely by quality, responsibility and achievement.
The internal environment of organization
(Source: Kaplan, 2001)
The external environment consists of those relevant physical and social factors outside the boundaries of the organization. Internal environment factors affect directly on the organization performance and could be anticipated and controlled by the management but the external environment factors are harder to predict and require more effort from the organization to adapt after. Normally the external environment is divided into two sections as macro-environment and micro-environment (industry). Mostly, we could define the external factors based on the scope of study like Porter's Five Forces (rivalry, new entrants, suppliers, buyers, and substitutes), PESTEL (political, economic, socio-cultural, technological, environmental, and legal). Porter's five forces are elements of micro-environment (industry) which consist of the competitors (rivalry) factor, thread of new entrants to the industry factor, bargaining power of suppliers, bargaining power of customers and the thread of other products that can substitute for their products. PESTEL are elements of macro-environment which consist of macro factors that organization have to adapt after and hardly resist. The basic model of these components is below:
(Source: JG media, 2010)
Impact of environmental influences on organizations.
Organizations often overlook the environmental factors due to the obvious, unexpected and normally hidden characteristic of the environmental factors. Environment influences are delicate and persistent as well as difficult to identify and measure. Osborn and Hunt (1974) accepted that as the environment start to change, the organization must adjust internal structure and processes to maintain their operation and/or increase productivity. As for Webster and Wind (1972) environment influences are recognized in four distinct ways. First, environment defines the availability of goods and services. This influence reflects mostly on physical, technological, and economic factors.
Second, environment defines the general business conditions including the rate of economic growth, the level of national income, interest rates, unemployment, etc. Economic and political forces are the main influences on general business conditions. Some of these forces are mainly task variables like economic factors, while others such as political variables may be hardly happened. Economic environment is an important element of general environment which consist of inflation, interest rate, unemployment etc. As these elements directly affect the business organizations, as well as employees, decisions should only be taken after having deeply studied and analyzed them. When inflation and interest rate increase the cost of goods therefore increase the price of products and lead to less sale. When the unemployment rise, the demand in buying would decrease and also lead to lower sale. These elements do not remain under control of business. So, the business organizations cannot affect these elements. Rather the organizations are affected by them.
Third, environmental factors determine the values and norms guiding inter-organizational relationship between buyers and sellers as well as among competitors, and between organizations and other institutions such as government and trade associations. Such values may be formed into laws or considered as law. Cultural social, legal, and political forces are the main sources of these values. Each change in these factors would result in directly impact on the organization. When the target customer demand for better products and service, the organization would have to upgrade their technology, resources in order to satisfy and maintain the customer.
Finally, environmental forces influent the information flows which most important is the flow of communications among potential suppliers, customers and the organization through mass media and other personal or impersonal channels. This influence reflects a variety of physical, technological, economic, and cultural factors.
Other than those main forces, Handel (2003) has also mentioned that the existence of a common legal environment have impacts on many aspects of an organization's behavior and structure. Webster and Wind (1972) has identified environmental influences are exerted through a variety of institutions including business organizations like suppliers, competitors and customers, governments, trade unions, political parties, etc. The nature of these institutions would vary from one country to another, Asian culture to European culture, etc. These are elements that indirectly impact the organization which are sometimes forgotten due to the lack of acknowledgment. A change in values, beliefs of different markets could have a great affect on organizations.
Hirsch (1975) argued in a comparison of the performance within the pharmaceutical industries that those obtained greater profits, controlled their environments better. A more concentrated industry; organization could restrict entry and manage their distribution channel more effectively. Though the environment factors all have great effect on organizations and change unexpectedly frequently, organization can still afford to reduce the affect of these factors if they understand the rules of environment and flexibly adapt after in a short time. Those with stronger scope and financial foundation could withstand the greater change in environment with less affect than normall organizations.
Environmental factors of organization are basic, essential and subjected to change any time so in order to survive, organizations have to be able to adapt to the environment changes. There are two major type of organization environment which are internal environment and external environment. Those segments are defined by the boundaries of the organization. Though recognized the importance of environment influences, organizations often overlook environment factors due to their basic and normal characteristics.