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Organizational Environment Theory – Evolution of Management Thought

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Organizational Environment TheoryOrganizational Environment Theory
Open Systems View and Contingency Theory
Principles of Management (POM)
BSc.CSIT | Third Semester Unit two
Tribhuvan University (TU)

Organizational Environment Theory
An important milestone in the history of management thought occurred when researchers went beyond the study of how managers can influence behaviour within organizations to consider how managers control the organization’s relationship with its external environment, or organizational environment – the set of forces and conditions that operate beyond an organization’s boundaries but affect a manager’s ability to acquire and utilize resources. Resources in the organizational environment include the raw materials and skilled people that an organization requires to produce goods and services, as well as the support of groups including customers who buy these goods and services and provide the organization with financial resources. One way of determining the relative success of an organization is to consider how effective its managers are at obtaining scarce and valuable resources. The importance of studying the environment became clear after the development of open-systems theory and contingency theory during the 1960s.

The Open-Systems View
One of the most influential views of how an organization is affected by its external environment was developed by Daniel Katz, Robert Kahn, and James Thompson in the 1960s. These theorists viewed the organization as an open system – a system that takes in resources from its external environment and converts or transforms them into goods and services that are then sent back to that environment, where they are bought by customers.

At the input stage, an organization acquires resources such as raw materials, money, and skilled workers to produce goods and services. Once the organization has gathered the necessary resources, conversion begins. At the conversion stage, the organization’s workforce, using appropriate tools, techniques, and machinery, transforms the inputs into outputs of finished goods and services such as cars, hamburgers, or flights to Hawaii. At the output stage, the organization releases finished goods and services to its external environment, where customers purchase and use them to satisfy their needs. The money the organization obtains from the sales of its outputs allows the organization to acquire more resources so that the cycle can begin again.

Researchers using the open-systems view are also interested in how the various parts of a system work together to promote efficiency and effectiveness. Systems theorists like to argue that “the parts are more than the sum of the whole”; they mean that an organization performs at a higher level when its departments work together rather than separately.

Contingency Theory
Another milestone in management theory was the development of contingency theory in the 1960s by Tom Burns and G.M. Stalker in the United Kingdom and Paul Lawrence and Jay Lorsch in the United States. The crucial message of contingency theory is that there is no one best way to organize: The organizational structures and the control systems that managers choose depend on – are contingent on characteristics of the external environment in which the organization operates. According to contingency theory, the characteristics of the environment affect an organization’s ability to obtain resources. To maximize the likelihood of gaining access to resources, managers must allow an organization’s departments to organize and control their activities in ways most likely to allow them to obtain resources, given the constraints of the particular environment they face. In other words, how managers design the organizational hierarchy, choose a control system, and lead and motivate their employees is contingent on the characteristics of the organizational environment.

An important characteristic of the external environment that affects an organization’s ability to obtain resources is the degree to which the environment is changing. Changes in the organizational environment include: changes in technology, which can lead to the creation of new products (such as compact discs) and result in the obsolescence of existing products (eight-track tapes), the entry of new competitors and unstable economic conditions. In general, the more quickly the organizational environment is changing, the greater are the problems associated with gaining access to resources and the greater is the manager’s need to find ways to coordinate the activities of people in different departments in order to respond to the environment quickly and effectively.

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