UNIT-1

Part I : Organizations and Its Environment

# Organizations and Organizational Effectiveness:
In simple terms, an organization is made of people with specific goals and objectives. It is
also defined as the relations among components of a system. Organizational structure denotes
these components and relations that bind people working in an organization.
An Organization is a system of consciously coordinated activities or efforts of two or more
persons:- Chester Barnard, Management Consultant.
It is a consciously coordinated social entity, with a relatively identifiable boundary, that
functions on relatively continuous basis to achieve a common goal.
The key features of an organization can be described as follows:
1. It is a group of people who are organized to achieve a common purpose.
2. It is an entity, a unit, or an establishment, which utilizes resources to achieve some
common purpose.
3. It shows a structure of relationships among members of an enterprise.
4. It is a process that enables people working in an enterprise to relate to tasks and
facilities, and helps them achieve intended goals.
# Organizational Effectiveness:
Effectiveness is the extent to which an activity helps in achieving the long term goals of an
organization. Since effectiveness is measured for specific activities, we can define activityspecific effectiveness as the outcome that supports the broader goals of an organization.
Organizations perform at different levels of effectiveness. Their growth per year is an
indicator of whether they are on a climb or decline. However, organizations in different
sectors vary in the way effectiveness is measured and described.
Both qualitative and quantitative tools are used to measure the overall effectiveness.
Behavioral parameters, such as values, attitudes, skills etc. are measured using qualitative
tools where as, Sales, profit, production etc. are measured by using quantitative tools.
Hence, organizational effectiveness is the extent to which the organization, as a whole,
achieves its goals while optimizing its resources. This depends on the management system,
organization structure, degree of inter-personal skills, positive attitude, technical
competencies, group activities etc. which together contribute to the achievement of
organizational goals and objectives.

There are basically three principal approaches in measuring and increasing organizational
effectiveness.
a)
External Resource Approach: An organization using external resource approach uses
technology to increase its ability to manage and control external stakeholders. Any new
technological developments that allow an organization to improve its services to customers,
such as the ability to customize products or to increase products quality and reliability,
increase the organizations effectiveness.
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b)
Internal System Approach: An organization taking the internal system approach uses
technology to increase the success of its attempts to innovate, to develop new products,
services, and process, and to reduce the time needed to bring new products to market.
c)
Technical Approach: An organization taking the technical approach uses technology
to improve efficiency and reduce costs while simultaneously enhancing the quality and
reliability of its products.
# Organizational Environment (Business Environment):
Environment literally means the surroundings, external objects, influences or circumstances
under which someone or something exists. Environment occupies a very significant place in
the functioning of an organization. Every organization is affected by the change in
environmental factors as they do exist in the same environment. Organizational environment
consists of the forces and conditions outside the boundaries of a firm. These forces change
overtime and thus present the firm with opportunities and threats that influence its ability to
carry out its operations effectively to attain its objectives. However, these forces differ
significantly from organization to organization, industry to industry and market to market.
The components of organizational environment can be classified into two broad categoriesInternal Environment and External Environment. The major forces in the organizational
environment are shown in the figure below.

I. Internal Environment:
The environmental forces that lie with in the organizational possession is called internal
environment. These environmental forces are controllable to large extent. They pose strength
and weakness for an organization. An organizations internal environment has the following
components.
a) Management/ Managers: The management system, and quality, competency, skill of
managers largely shape the outcomes of an organization. Skillful and competent
management is strength where as poor management is weakness for the organization.
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b) Shareholders: Shareholders are the real owners of an organization who have a direct
interest in the performance of the organization. The directors elected by them
represent their interest in the board of the organization which ultimately influence the
organization.
c) Structure: Structure is the architecture or framework for organizational roles,
hierarchy, relations, authority and responsibility. It comprises individuals, groups,
units, and their interrelationships. The type of structure and its frequent change also
influence the organizational performance.
d) Employees and their unions: Employees are important assets of an organization.
Participation and cooperation with employees is helpful to enhance productivity and
attain the desired goals. Similarly, labour unions (representing the member
employees) directly or indirectly work for the welfare of the labour, which has rich
relation with organization decisions.
e) Corporate culture: Corporate culture represents the collective beliefs, values and
attitude of the organizational employees. Both internal and external factors affect an
organizational culture. Organizational culture has a powerful influence on the process
of organizational change and decision-making.
II. External Environment:
The external environment is more complex and difficult to predict. It is that portion of
environment which lies outside the boundary of organization. The external environment can
further be classified into two interrelated sub-categories: general (macro) environment, and
task (micro) environment. External environment offers opportunities and threats caused by
the external forces.
a) General (macro) Environment:
The general environment composed of a set of forces that are outside the organizations
operating system. It affects the organization and its task environment. It generally includespolitical, economic, social, legal, and technological factors. These are the forces, which are
beyond the control of the business firms. The general environment presents opportunities,
threats and constraints for the organization. For a manager, opportunities and threats resulting
from changes in the general environment are often more difficult to identify and respond to
them in the task environment.
i) Economic Environment: The economic environment for an organization involves the
system of economic planning and control, fiscal, monitory and industrial policies, the
prevailing conditions in the agriculture, industrial and service sectors and so on. Bad or poor
economic conditions make the environment more complex and managers job more difficult
and challenging.
ii) Political and Legal Environment:
The political environment refers to the government system, structure composition of
bureaucracy, political stability, government-business relation. The policies the government
undertakes regarding distribution of economic resources, liberalization, framework of rules
and regulations, are highly responsible to determine investment friendly or poor business
environment. Government action and decisions, and court decisions regarding encourage,
guide and control business, and consumers, communities and workers actions are also
important equally which shape the business organizations environment.
iii) Socio-cultural Environment:
Socio-cultural environment comprises of social structural issues (class structure, desires,
expectations, beliefs, customs etc.) and cultural issues (values, norms, behavior patterns etc.).

These forces and factors largely affect the organizational activities directly or indirectly. So,
the managers must keep on studying and respond to them.
iv) Technological Environment: Drastic developments in the field of communication,
information, and other technology have been taking place. In this global age, the outcomes of
such changes are enormous and equally advantageous. The changes in this field pose both
opportunities and threats for the organizations.
b) Task Environment:
Task environment is also called specific environment that is directly relevant to an
organization in achieving its goals. At any given moment, it is that part of the environment
with which management will be concerned because it is made up of those critical
constituencies that can positively or negatively influence the organizations effectiveness. It is
unequal to each organization and it changes with conditions. Typically, it includes forces such
as customers, suppliers, competitors, government, financial institutions, labour unions, media
etc.
i) Customers:
A customer may be an individual, a family, a business house or an institution. They are
important in the sense that an organization exist to serve them. They are not only linked with
the organization for the purchase of goods or services but they are also an important source of
ideas, opinions, information, and reactions. Managers, therefore, must maintain a close
relationship with them.
ii) Suppliers:
Suppliers supply the raw materials for the business organization on which it operates. The
regular supply of such materials with good quality at desirable price is very important for the
organizations to operate or produce and deliver quality goods and services effectively.
Changes in the nature, numbers or types of any supplier result in forces that produce
opportunities and threats to the organization.
iii) Competitors:
Competition in the market for an organization is inevitable in this age. To take competitive
advantages, information on market behavior and competitors strategies is gathered and
analyzed to identify future opportunities and threats for the firm. Managers must work out
strategies to deal with the competitors and competing products. Rivalry relation between
competitors is potentially the most threatening force that the managers must deal with.
iv) Labour Unions:
Labour unions who work in the organization and other professional organization may exert
pressure to fulfill their interests. These groups may influence the organization by drawing
attention of the politicians, legislators and media. Sometime they may take the worse path so
that strike and violence may take place in the organization. Progressive managers must
understand their desire and employ a participative strategy to build a sound and constructive
relation with them.
v) Financial Institutions:
Financial institutions provide financial services to the organizations to meet their long term as
well as short term needs. The terms and conditions of loans and advances, and the quality of
their services have an impact on the performance of an organization.

# Managing in a Changing Global Environment (Contemporary issues and challenges of

management):
Globalization implies an integration of world economies. It includes a rapid increase in the
movement of goods, services, and capital across national borders. It is related to increase in
the significance of individual business that operates in a range of countries. Increasingly,
these businesses see the world as a single market.
Mangers must have the insight to see and understand the emerging organizational challenges.
Several challenges confront managers today. These challenges are arising mainly from the
significant changes in the outside world. We are faced with more turbulent economic periods.
Managers face a more restless workforce, more domestic and international competition, and
declining industrial performance. They must, therefore, have the skill to diagnose the
environment, analyze competitors actions, compete in international market, and manage the
organizational change. The managers task today, is to respond to emerging issues and
challenges.
Following are the key issues or challenges for managers in this globalized age.
a) Workforce diversity:
Organizations are becoming more heterogeneous in terms of gender race, ethnicity, and other
backgrounds due to globalization. The participation of women and minorities in the
workforce has been increasing. It will continue to increase in the years to come. Managers
should realize that employees come to work with their cultural values and lifestyle
preferences. The challenge for managers, therefore, is to become more accommodating to
diverse groups of people. Conflicts are more apparent today. Consensus is more difficult to
achieve because of the diverse backgrounds of employees.
Managers, therefore, will need to shift their approaches and philosophy to workforce
management. They should recognize the differences among employees and respond to them
in ways that will ensure employee commitment. Diversity, if managed positively, can increase
creativity and innovation in organizations.
b) Empowerment:
Organizations are becoming more and more participative these days. The role differences
between the managers and workers have narrowed down considerably. Decision making is
being pushed down to the operating level. Workers are now given freedom to make choice
about schedules, procedures and solving work related problems.
Managers are going considerably further by allowing employees full control of their work.
More information is provided to employees to make them aware of the problems and
prospects of their organization. Thus, managers are engaged in empowering employees.
Various methods of empowerment ranging from simple participation to self-managed work
teams have now been practiced in organizations.
c) Technological Advancement:
The modern business is characterized by newer and ever-changing technological perspective.
Technological changes such as advances in computers and other electronic data processing
equipment have changed the whole system of decision-making. Faster processing of
information in material handling, storage, and transportation has enabled the managers to
make products available to customers at right time, in the right place, and in relatively good
condition. Managers must, therefore, have proper understanding of these aspects.
Technology management has now emerged as an important and crucial management process
in the modern business organizations to cope with technological change and match the
competitive market.
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d) Innovation and Change:

The taste and preference of customers regarding goods and services, an organization offers,
have been changing. Hence, organizations must pay attention to innovation and change.
Products or services need continuous improvement, up gradation, and modification. In order
to beat competitors in the market place, managers must flow innovative products and
services. The challenge for mangers is to stimulate employee creativity and wide participation
and support for continuous innovation and change.
e) Ethics and Social Responsibility:
Ethics refers a code of conduct through which managerial activities are guided. Today, in
most societies codes of ethics have been prescribed for business. Violence of these codes by
organizations could be costly for itself. Similarly, as a member of a society, an organization
should be responsible regarding social issues. Today, organizations are expected to contribute
to the society as a whole. Environmental issues regarding discharge of waste, air and noise
pollution are the matters for public attention. Therefore, social responsibilities and ethical
issues are handled and managed by managers, which is really a challenging task for them.
f) Corporate Governance:
Corporate governance is concerned with the issues such as; fairness, accountability,
responsibility, and transparency in the organizations. Today, it has been realized by the
managers that corporate governance is an essential tool for improving performance. The
stakeholders (shareholders, customers, government, society, employees, other institutions)
have a demand of accountable and transparent management in the organizations. Their
expectations would obviously create the challenge in this competitive global age.
# Organizational Stakeholders:
Organization exist because of their ability to create value and acceptable outcomes for
various groups of stakeholders, people who have an interest, claim or stake in the
organization, in what it does and in how well it performs. In general, stakeholders are
motivated to participative in an organization if they receive inducements that exceed the
value of the contributions they are require to make. Inducements are rewards such as money,
power, and organizational status. Contributions are the skills, knowledge, and expertise that
organizations require of their members during task performance.
There are two main groups of organizational stakeholders: inside stakeholders and outside
stakeholders. The inducements and contributions of each group are visualized in the table
below.
Stakeholders
Contributions
to
the Inducement to contribute
Organization
Inside Stakeholders:
Shareholders
Money and Capital
Dividends
and
Wealth
maximization
Managers
Knowledge,
Skill
and Salaries, bonuses, status and
Expertise
power
Employees/Workforce
Skill and Expertise
Wages, bonuses, job security
and promotion
Outside Stakeholders:
Customers
Revenue
by
making Quality goods and services
expenditure in goods and with desirable price
services
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Suppliers
Government
Labour Unions
Society

High quality inputs (raw

materials and accessories)
Rules
and
Business
Environment
Fair collective bargaining

Revenue from purchase of

Inputs
Tax revenue and fair
operation
Participations and employee
welfare
Social infrastructure, loyalty Employment, Social welfare
and reputation
and pride

# Managerial Ethics:
Ethics are moral principles or beliefs about what is right or wrong. These beliefs guide
individuals in dealings with other individuals and groups (stakeholders) and provide a basis
for deciding whether a particular decision or behavior is right and proper. Managerial ethics
is a code of conduct through which managerial activities are guided. Ethics helps managers
determine moral responses to situations in which the best course of action is unclear. Ethics
guide managers in their decisions about what to do in various situations. Ethics also help
managers decide how best to respond to the interests of various organizational stakeholders.
Sometimes, making a decision is easy because some obvious standards, value or norm of
behavior applies. In other cases, mangers have trouble deciding what to do and experience an
ethical dilemma when comparing the competing claims or rights of various stakeholders. It is
very difficult to make decisions in some cases. For example: whether a manager is to allow
its representative to pay bribes to government officials in foreign counties where corruption is
common way of doing business. In this situation managers are in a difficult situation because
they have to balance their interest and interest of the organization against the interest of other
stakeholders.
Following an ethical rule avoids expending time and effort in deciding what is right thing to
do. Thus reduce transaction cost between people, that is, the cost of monitoring, negotiating
and enforcing agreements with other people. Ethics is also helpful equally to create a good
reputation, because, people want to deal with those organizations operating with high ethical
standards. Organizational ethics is also equally important to satisfy and make the managers
and employees feel pride and valuable.
In sum, acting ethically promotes the good of a society, and the well-being of its members.
More value is created in societies where people follow ethical rules, and where criminal and
unethical behaviors are prevented by law and by custom and practice from emerging.
# Creating Ethical Organization:
There are many ways in which managers can create organizational ethics. As a leader
(figurehead), a manager can promote morale values that result in specific ethical rules and
norms that people use to make decisions. An organization can encourage people to act
ethically by putting in place incentives for ethical behavior and disincentives to punish those
who behave unethically. As a liaison or spokesperson, a manager can inform prospective
customers and other stakeholders about the organizations ethical values and demonstrate
those values through behavior toward stakeholders such as by being honest and
acknowledging errors. Following are the commonly used methods to ethical organization.

a) Designing an ethical structure and control system:

Managers can design an organizational structure that reduces the incentives for people to
behave unethically. The creation of authority relationships and rules that promote ethical
behavior and punish unethical acts will encourage members to behave in socially responsible
way. Ethical values flow from the top of the organization but are strengthened or weakened
by the design of the organizational structure.
b) Creating ethical culture:
The values, rules, and norms that define an organizations ethical position are part of its
culture. The behavior of top managers strongly influences organizational culture. An ethical
culture is most likely to emerge if top managers are ethical, and an unethical culture can
become an ethical one if top-management team is changed. The creation of an ethical
corporate culture requires commitment at all levels of an organization, from the top to down.
c) Supporting the interest of stakeholders:
The interest of internal and external stakeholder is also helpful to create ethical organization.
The owners do not want to hold stocks in companies that engage in socially questionable
activities. So, the owners representing in the board of directors try to create organizational
discipline. Pressure form outside stakeholders can also promote ethical organizational
behavior. The government and its agencies, industry councils and regulatory bodies and
consumer watchdog groups play a role in establishing the ethical rules that organizations
should follow when doing business.
# Sources of Environmental Uncertainty:
The forces in the environment cause uncertainty for organizations and make it more difficult
for managers to manage. The set of forces that cause problems, increases uncertainty and
affect the complexity, dynamism and richness of the environment. As these forces cause the
environment to become more complex, less stable, and poorer, the level of uncertainty
increases.
a) Environmental complexity:
The presence of number of forces, their strength and interconnections determines the level of
complexity in an organizations environment. The greater the number and the greater the
difference between them, more complex and uncertain is the environment and more difficult
to predict and control.
b) Environmental Dynamism:
How frequently the forces in the environment change also contribute to the environmental
uncertainty. An environment is stable if the forces affect the supply of the resources in a
predictable way. An environment is unstable and dynamic if an organization cannot predict
the way in which the forces will change over time. An organization in a dynamic, unstable
environment will see ways to make to the environment more predictable and thereby lessens
the organizations uncertainty about environment.
c) Environmental Richness:
Environmental richness refers the amount of resources available to support an organizations
domain. In rich environment, resources are plentiful and uncertainty is low because
organizations need not compete for resources. Basically there are two reasons for poor
environment.
i)
The organization is located in a poor country or poor site of a country
ii)
There is high level of competition, and organizations fight for resources

In poor environments, organizations have to battle to attract customers or obtain the best
inputs. The result of these battles is greater uncertainty for the organizations. The poorer the
environment, the more difficult the problems organizations face in managing resource
transactions.
# Interorganizational Strategies for Managing Resource Dependencies:
Organizations are dependent on their environment for resources they need to survive and
grow. The supply of resources, however, is dependent on the complexity, dynamism, and
richness of the environment. Organizations attempt to manage their transactions with the
environment to ensure access to the resources on which they depend.
To reduce uncertainty, an organization needs to devise interorganizational strategies to
manage the resource interdependence in the specific and general environment. In the specific
environment, an organization needs to manage its relationships with forces such as suppliers,
unions, and consumer interest groups. Following are the most commonly used strategies by
the organizations in this regard.
a) Long-Term Contracts:
Long-term contract involves a contract between two or more organizations to carry-out future
transactions with certainty. The purpose of these contracts is usually to reduce cost by sharing
resources or by sharing risk of research and development, marketing, construction, and other
activities. Contracts are the least formal type of alliance because no ties link the organizations
apart from the agreement set forth in the contract.
b) Strategic alliance:
A strategic alliance is an agreement that commits two or more organizations to share their
resources to develop joint new business opportunities (joint ventures). Joint ventures are the
most formal of the strategic alliance because the participants are bounded by formal legal
agreement that spells out their rights and responsibilities.
c) Minority Ownership:
Ownership is a more formal linkage than other contracts. Minority ownership makes
organizations extremely interdependent, and that interdependence forges strong cooperative
bonds.
The Japanese system of Keiretsu shows how minority ownership network operates.
Keiretsu is a group of organizations, each of which owns shares in the other organizations in
the group, and all of which work together to further the groups interests.
d) Merger and takeover:
An organization some times takes over another organization or one organization gets merged
with another organization. As a result of a merger or takeover, resource exchanges occur
within one organization rather than between organizations, and an organization can no longer
be held hostage by a powerful supplier or by a powerful customer.
e) Collusion and cartels:
Collusion is a secret agreement among competitors to share information for a deceitful or
illegal purpose. Organizations collude in order to reduce the competitive uncertainty they
experience. Similarly, a cartel is an association of firms that explicitly agrees to coordinate
activities. Cartel and collusion increase the stability and richness of an organizations
environment and reduces the complexity of relations among competitors.