Fitting Design to Situation: Environment of Organization

We have so far discussed the influence on structure of factors intrinsic to the organization itself—its age, its size, and the technical system it uses in its operating core. But every organization also exists in a milieu to which it must respond when designing its structure. Now we consider situational factors associated with this milieu; first the characteristics of the general environment, then specific aspects of the system of power faced by the organization.

What does the word environment really mean? The dictionary is as vague as the literature of management: “the aggregate of surrounding things, conditions, or influences . . .” (Random House Dictionary). So en- vironment comprises virtually everything outside the organization—its “technology” (the knowledge base it must draw upon); the nature of its products, customers, and competitors; its geographical setting; the eco- nomic, political, and even meteorological climate in which it must operate; and so on. What the literature does do, however, is focus on certain dimen- sions of organizational environments, four in particular:

  1.  Stability. An organization’s environment can range from stable to dy- namic, from that of the wood carver whose customers demand the same pine sculptures decade after decade, to that of the detective squad that never knows what to expect next. A variety of factors can make an environ- ment dynamic, including unstable government, unpredictable shifts in the economy, unexpected changes in customer demand or competitor supply, client demands for creativity or frequent novelty as in an advertising agen- cies, rapidly changing technologies as in electronics manufacturing, even weather that cannot be forecasted, as in the case of open-air theater com- panies. Notice that dynamic here means unpredictable, not variable; vari- ability may be predictable, as in steady growth of demand.
  2.  Complexity. An organization’s environment (here, its “technology”) can range from simple to complex, from that of the manufacturer of folding boxes who produces his simple products with simple knowledge, to that of the space agency that must utilize knowledge from a host of the most advanced scientific fields to produce extremely complex outputs. Clearly, the complexity dimension affects structure through the intermediate vari- able of the comprehensibility of the work to be done. Note that rationalized knowledge, no matter how complex in principle, is here considered simple because it has been broken down into easily comprehended parts. Thus, automobile companies face relatively simple product environments by vir- tue of their accumulated knowledge about the machines they produce.
  3. Market Diversity. The markets of an organization can range from inte- grated to diversified, from that of an iron mine that sells its one commodity to a single steel mill, to those of a trade commission that seeks to promote all a nation’s industrial products all over the world. Market diversity may result from a broad range of clients, of products and services, or of geographical areas in which the outputs are marketed. Clearly, market diversity affects the structure through the intermediate variable of the diversity of the work to be
  4.  Hostility. Finally, an organization’s environment can range from mu- nificent to hostile, from that of a prestige surgeon who picks and chooses his patients, through that of a construction firm that must bid on all its con- tracts, to that of an army fighting a war. Hostility is influenced by competi- tion, by the organization’s relations with unions, government, and other outside groups, and by the availability of resources to it. Of course, hostile environments are typically dynamic ones. But extreme hostility has a spe- cial effect on structure that we wish to distinguish. Hostility affects struc- ture especially through the intermediate variables of the speed of necessary response.

What matters about environment in the design of structure is its specific effect on the organization. In other words, it is not the environ- ment per se that counts but the organization’s ability to cope with it—to predict it, comprehend it, deal with its diversity, and respond quickly to it. That is why, for example, when discussing the complexity dimension, we noted that if the organization is able to rationalize what seems to be a complex product into a system of simple components, its product environ- ment can be called simple. Also, although it is convenient to discuss an organization’s environment as uniform—a single entity—the fact is that every organization faces multiple environments. The products may be complex but the marketing channels simple, the economic conditions dy- namic but the political ones stable. ‘Often, however, it is a reasonable approximation to treat the environment as uniform along each of its di- mensions, either because some of its more placid aspects do not really matter to the organization or, alternatively, because one active part of the environment is so dominant that it affects the entire organization. We shall proceed under this assumption in the first four hypotheses presented be- low, each considering one of the dimensions, taking up the case of contra- dictory demands from the environment in the fifth hypothesis.

Hypothesis 9: The more dynamic the environment, the more organic the structure. In peacetime, or well back from the battlefield in wartime, armies tend to be highly bureaucratic institutions, with heavy emphasis on planning, formal drills, and ceremony, close attention being paid to disci- pline. On the battlefield, at least the modern one, there is the need for greater flexibility, and so the structure becomes less rigid. This is especially so in the dynamic conditions of guerrilla_warfare. It stands to reason that in a stable environment, an organization can predict its future conditions and so, all other things being equal, can easily insulate its operating core and standardize its activities there—establish rules, formalize work, plan ac- tions—or perhaps standardize its skills instead. But this relationship also extends beyond the operating core. In a highly stable environment, the whole organization takes on the form of a protected, or undisturbed sys- tem, which can standardize its procedures from top to bottom. Alter- natively, faced with uncertain sources of supply, unpredictable customer demand, frequent product change, high labor turnover, unstable political conditions, or rapidly changing technology (knowledge), the organization cannot easily predict its future, and so it cannot rely on standardization for coordination. It must use a more flexible, less formal coordinating mecha- nism instead—direct supervision or mutual adjustment. In other words, it must have an organic structure.

Note the wording of Hypothesis 9: Dynamic environments lead to organic structures, instead of stable environments leading to bureaucratic ones. This wording was chosen to highlight the asymmetrical nature of the relationship—that dynamic conditions have more influence on structure than do static ones. Specifically, there is evidence to suggest that a dynam- ic environment will drive the structure to an organic state despite forces of large size and regulating technical system that act in the opposite direction, whereas a stable environment will not override the other situational fac- tors—the structure will be bureaucratic to the extent called for by these other factors.

Hypothesis 10: The more complex the environment, the more de- centralized the structure. Before proceeding with discussions of this hy- pothesis, it will be useful to clarify the distinction between environmental stability and complexity.

Conceptually, it is not difficult to distinguish between these two di- mensions of environment. The dice roller easily comprehends his game, yet he cannot predict its outcome. His environment is simple but dynamic. So, too, is that of the dress manufacturer, who easily comprehends his markets and technologies yet has no way to predict style or color from one season to the next. In contrast, the clinical surgeon spends years trying to learn his or her complicated work, yet undertakes it only when rather certain of its consequences. This environment is complex but stable.De- spite this, perhaps because many organizations face environments that are simple and stable or complex and dynamic, these two dimensions have often been confused. Yet we shall soon see that important types of organi- zations face, in one case, simple and dynamic, and in another, complex and stable environments. Again we can turn to our coordinating mecha- nisms to help resolve the confusion.

Our tenth hypothesis suggests that the complexity dimension has a very different effect on structure from the stability one. Whereas the latter affects bureaucratization, the former affects decentralization. One of the problems in disentangling Hypotheses 9 and 10, aside from the fact that the two environmental variables often move in tandem, is that the most bureaucratizing of the coordinating mechanisms—the standardization of work processes—also tends to be rather centralizing, whereas one of the most organic—mutual adjustment—tends to be the most decentralizing. The relationship between the five coordinating mechanisms and bureau- cratization was discussed in Chapter 2, that between the mechanisms and decentralization in Chapter 5. Figure 6-3 summarizes these two discus-sions, with the coordinating mechanisms of increasing bureaucratization shown along the ordinate and those of increasing decentralization along the abscissa (the latter is, in fact, a replication of Figure 5-3).

Figure  6-3.     Coordinating mechanisms on scales of de- centralization and bureaucratization

We can draw on an argument of Galbraith to use the coordinating mechanisms as shown in Figure 6-3 to disentangle the two hypotheses, and thereby to develop more support for each. Galbraith argues that cooft- dination is most easily achieved in one brain. Faced, therefore, with a simple environment, the organization will tend to rely on one brain to make its key decisions; in other words, it will centralize. Should that en- vironment also be stable, according to Hypothesis 9 it will be in the organi- zation’s best interests to standardize for coordination—in other words, to bureaucratize. As can be seen in Figure 6-3, the organization will select the standardization of work processes for coordination, the mechanism that enables it to maintain the tightest centralization within a bureaucratic structure. But should its simple environment be dynamic instead of stable, the organization can no longer bureaucratize but must, rather, remain flexible—organic. So, as Figure 6-3 shows, it will rely on direct supervision for coordination, the one mechanism of the five that enables it to have a structure that is both centralized and organic.

What about the organization faced with a complex environment? This introduces problems of comprehensibility. In Galbraith’s terms, one brain can no longer cope with the information needed to make all the decisions. It becomes overloaded. So the organization must decentralize: The top manager must give up a good deal of his power to others—other manag-ers, staff specialists, sometimes operators as well. Now, should that com- plex environment be stable, Hypothesis 9 would lead us to expect a bu- reaucratic structure—in other words, one that relies on standardization for coordination. In that case, the problem becomes to find a coordinating mechanism that allows for standardization with decentralization. And the solution emerges with a quick glance at Figure 6-3: the organization chooses the standardization of skills. Should the complex environment instead be dynamic, the organization seeks a coordinating mechanism that is both decentralizing and organic. Mutual adjustment is the obvious choice.

What emerges from this discussion are two kinds of bureaucratic and two kinds of organic structures, in each case a centralized one for simple environments and a decentralized one for complex environments. That, in fact, corresponds exactly to the conclusion that emerged repeatedly in our discussion of the design parameters. There, for example, we encountered two fundamentally different bureaucracies, a centralized one for unskilled work, a decentralized one for professional work. Now we see that the former operates in a simple environment, the latter in a complex one, in both cases stable. We shall return to these four types shortly.

Hypothesis 11: The more diversified the organization’s markets, the greater the propensity for it to split into market-based units (given favor- able economies of scale). Here we propose a relationship between a third environmental variable—market diversity—and a third design param- eter—the basis for grouping units. Hypothesis 11 indicates that the organi- zation that can identify distinctly different markets—products or services, geographical regions, or clients—will be predisposed to split itself into high-level units on this basis, and to give each control of a wide range of the decisions affecting its own markets. This amounts to what we called in Chapter 5 limited vertical decentralization, a good deal of the decision- making power being delegated to the managers of the market units. In simple terms, diversification breeds divisionalization.

There is, however, one key impediment to divisionalization, even when markets are diverse, and that is the presence of a common technical system or critical function that cannot be segmented. In divisionalization, each market unit requires its own distinct operating core. This it cannot have when economies of scale dictate a single, unified technical system. Some technical systems can be split up even though of very small scale, and others must remain intact despite massive size. A bakery operating in two states with total sales of, say, $2 million may find it worthwhile to set up a division with its own plant in each, whereas an aluminum producer with sales 100 times as great may, despite a diversity of customers in all fifty states and a variety of end products (foil, sheets, construction compo- nents, and so on), be forced to retain a functional structure because it can afford only one smelter.

Likewise, the presence of a function critical to all the markets in common impedes true divisionalization, as in the case of purchasing in the retail chain or investment in the insurance business. The organization still splits itself into market-based units, but it concentrates the critical function at headquarters. This reduces the autonomy of the market units, leading to an incomplete form of divisionalization. In fact, as we shall see in Chapter 11, this is most common when the diversity is based on client or region rather than on product or service, common outputs giving rise to impor- tant interdependencies among the different clients or regions.

We can explain Hypothesis 11 in terms similar to those used to ex- plain Hypothesis 10. The organization that must comprehend information about many different aspects of its market environment eventually finds it convenient to segment that environment into distinct markets if it can and to give individual units control over each. In this way it minimizes the coordination of decision making that must take place across units. We must, however, make a clear distinction between environmental diversity and complexity, even though both increase the informational load on the decision makers and thereby encourage some kind of decentralization. A simple environment can be very diverse, as in the case of a conglomerate firm that operates a number of simple businesses, whereas a complex environment may focus on an integrated market, as in the case of the NASA of the 1960s that had one overriding mission—to put a man on the moon before 1970.7 In fact, for reasons that we shall discuss in Chapter 11, divisionalization appears to be better suited to simple diversified markets than to complex ones.

Hypothesis 12: Extreme hostility in its environment drives any orga- nization to centralize its structure temporarily.8 Again, we can explain this in terms of our coordinating mechanisms. Direct supervision is the fastest and tightest means of coordination—only one brain is involved. All mem- bers of the organization know exactly where to send information; no time is wasted in debate; authority for action is clearly defined; one leader makes and coordinates all the decisions. As we saw in Chapter 5, the more centralized communication networks organized themselves more quickly and required less communication to make decisions. When an organization races extreme hostility—the sudden loss of its key client or source of sup- ply, severe attack by the government, or whatever—its very survival is threatened. Since it must respond quickly and in an integrated fashion, it turns to its leader for direction.

But what of the organization in a complex environment that faces extreme hostility? The complexity requires it to decentralize in order to comprehend the environment, yet the hostility demands the speed and coordination of a centralized response. Forced to choose, the organization presumably centralizes power temporarily, in order to survive. This en- ables it to respond to the crisis, even if without due regard for its complex- ity. With some luck, it may be able to ride it out. But should the crisis persist, the organization may simply be incapable of reconciling the two opposing forces. It may simply expire.

Hypothesis 13: Disparities in the environment encourage the organi- zation to decentralize selectively to differentiated work constellations. No organization has ever existed in an environment uniformly dynamic, com- plex, diverse, or hostile across its entire range. But the organization need not respond to every contingency in its environment either. Some are exigent, demanding responses; others are placid, requiring none. Dynamic economic conditions may require organic structure even though the politi- cal environment is stable; hostility from the union in an otherwise munifi- cent environment may require temporary centralization followed by a re- turn to decentralization. But what happens when one contingency does not dominate, when disparities in the environment call for different re- sponses in the design of the structure? Take the case of mixed competition in the large oil company:

Mobil Oil and Exxon may compete furiously at the intersection of two streets in any American town, but neither of them is really threatened by this mar- ginal competition. They work very closely together in the important matter of oil depletion allowances, our foreign policy about the Mideast, federal tax policies, the pollution issues, and private transit versus mass transit. . . .

Where, then, is the furious rate of competition? At the lower levels in the organization—the levels of the regional manager who moves prices up and down a fraction and the station manager who washes the windshields and cleans the rest rooms. (Perrow, 1974:41)

What this example suggests is that disparities in the environment encourage the organization to differentiate its structure, to create pockets—what we earlier referred to as work constellations—to deal with different aspects of the environment (different “subenvironments”).9 Each constellation is located according to the effect of its subenvironment on the organization—near the top if the effect is universal, farther down if it is local. The managers at the top of the oil company can attend to cooperation while those in the regions deal with the competition. Each work constella- tion is given power over the decisions required in its subenvironment, and each is allowed to develop the structure its decision processes require. For example, one constellation of an organization may be organically struc- tured to handle dynamic conditions, and others, operating in stable suben- vironments, may be structured bureaucratically. We saw this earlier in the case of the new venture teams isolated from the rest of their structures. Thus, disparities in the environment encourage the organization to differ- entiate its structure and to use selective decentralization in both the vertical and horizontal dimensions. In other words, it can centralize and decentral- ize at the same time.

This is clearly illustrated by the McGill MBA group study of the Cana- dian subsidiary of a European recording company. There were two sharply differentiated constellations here. One, at the strategic apex, comprised the top managers sent from the European headquarters. They handled liaison with it, the financial affairs of the company, and some of the production problems, all relatively stable and simple issues. But the marketing deci- sions—in particular, what Canadian stars and songs to record—required intimate knowledge of the local scene, of the tastes of the Canadian con- sumers, both English and French, and of Canadian entertainment person- alities. It also required a very different, orientation to decision making. With a product life cycle of three months (“there is nothing quite so dead as yesterday’s number one hit on the hit parade”) and with the most dynamic of supply markets (recording artists being “notoriously hard to get along with”), marketing required a free-wheeling style of decision making, in sharp contrast to that of the rather straightlaced European executives. Thus, a second work constellation was created below the first and given complete and undisputed power over marketing decisions. It worked in a structure for which the word “organic” seemed an understatement.10

1. An organizational type for each of four environments

Our discussion of the environment again supports our contention that we learn more by focusing on distinct types of structures found under specific conditions than by tracing continuous relationships between structural and situational variables. Hypotheses 9 and 10, although initially stated in terms of continuous relationships, seem more powerful when used to gen- erate specific types of structures found in specific kinds of environments. In particular, four basic types emerge from that discussion, shown in ma- trix form as follows:

Simple, stable environments give rise to centralized, bureaucratic structures, the classic organizational type that relies on standardization of work processes (and the design parameter of formalization of behavior) for coordination. Examples are Woodward’s mass-production manufacturing firms and Crozier’s tobacco company. Lawrence and Lorsch so describe certain container firms, operating in simple, stable environments, that standardized their products and processes, introduced changes slowly, and coordinated at the top of the hierarchy where information could easily be consolidated and understood. In fact, one container firm that tried to do the opposite—to use the liaison devices to coordinate by mutual adjust- ment lower down—exhibited lower performance than the others. Appar- ently, it just confused a simple situation, like four people in a car all trying to decide which way to drive downtown.

Complex, stable environments lead to structures that are bureaucratic but decentralized, reliant for coordination on the standardization of skills. Because their work is rather predictable, the organization can standardize; and because that work is difficult to comprehend, it must decentralize. Power must flow to the highly trained professionals of the operating core who understand the complex but routine work. Typical examples of this are general hospitals and universities.11

When its environment is dynamic but nevertheless simple, the orga- nization requires the flexibility of organic structure, but its power can re- main centralized. Direct supervision becomes its prime coordinating mech- anism. This is characteristic of the entrepreneurial firm, which seeks a niche in the marketplace that is simple to understand yet dynamic enough to keep out the bureaucracies. In such a place, the entrepreneur can main- tain a tight personal control, not even having to share his power with a technostructure.

When the dynamic environment is complex, the organization must decentralize to managers and specialists who can comprehend the issues, yet allow them to interact flexibly in an organic structure so that they can respond to unpredictable changes. Mutual adjustment emerges as the prime coordinating mechanism, its use encouraged by the liaison devices. Research studies have described NASA during the Apollo project, the Boeing Company, and plastics firms in general in this way. (Note, in Stinchcombe’s terms, that these are all organizations of our age.)

Market diversity, as discussed in Hypothesis 11, can be viewed as a third dimension—in effect, as a separate condition superimposed on the two-dimensional matrix. These four types of structures will tend to be functional if their markets are integrated, market-based (at least at the highest level of grouping) if they are diversified (assuming favorable econ- omies of scale and an absence of critical functions). Since, as we saw in Chapter 4, coordination in the market-based structure is achieved by the standardization of outputs, effected through performance control systems, we are able to account for our fifth and last coordinating mechanism in this third dimension.

Similarly, Hypothesis 12 can be viewed as imposing another special condition on the two-dimensional matrix. Extreme hostility drives each of the four types to centralize its structure temporarily, no matter what its initial state of decentralization. (Two, of course, are already rather centralized.)

All these conditions assume uniform environments, or at least ones that can be treated as uniform, owing to the dominance of a single charac- teristic. They are either complex or simple, stable or dynamic, integrated or diversified, extremely hostile or not. Uniformity, in turn, produces con- sistent use of the design parameters in the structure. Hypothesis 13 drops the assumption of uniformity, indicating that disparities in the environ- ment encourage the organization to respond with a differentiated struc- ture. It sets up work constellations, decentralizes power selectively to them, locates each according to the effect of its decisions on the organiza- tion, and allows it to design its internal structure according to the demands of its particular subenvirohment.

Source: Mintzberg Henry (1992), Structure in Fives: Designing Effective Organizations, Pearson; 1st edition.

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