Is Your Organization Influenced by the Environment?

Environment is usually a dominant influence for small firms in highly competitive environments with few resources, and midsized firms in uncertain situations. In this scenario, there is little potential for product differentiation and few barriers to entry. Small profit margins lead to simple, centralized, cost efficient strategies that can respond quickly to changing markets. In an unstable economy, more organizations will move towards environmental influence when there is an increase in external uncertainty. They will only move away from environmental influence when their company accumulates sufficient market power through size, differentiation, vertical integration, and diversification.

According to the book, Structure in Fives: Designing Effective Organizations, there are 4 types of structures found under specific environmental conditions. Simple, stable environments result in organizations that rely on standardization of processes and centralization for coordination. Complex, stable environments lead to decentralized structures that coordinate through the standardization of skills. Dynamic, simple environments rely on flexible, organic structures while remaining centralized. Dynamic, complex environments have decentralized organizations so managers or specialists can understand the issues. The structure provides flexibility so the firm can respond to unpredictable changes. Extreme hostility in the environment will drive organizational types to temporarily centralize their structures.

There are seven external categories that can influence an organization and affect their bottom line:

• Economic - inflation, interest rates, employment, incomes
• Social - births, housing, population trends
• Cultural - consumer values, safety, needs, beliefs
• Resources - materials, labor, credit, investors
• Government - laws, regulations, contracts, trade
• Political - policies, tariffs, taxes, elections
• Industry - competitors, prices, technology, markets

Supporters of environmental influence suggest that organizations must adapt to their surroundings because constraints determine which forms of strategy and structure are practical. The environment, as a cause, imposes uniformity by extinguishing organizations that ignore it. It is assumed that gross departures from industry standards will lead to failure. This position is held by many traditional contingency theorists and industrial economists.

Environmental scanning can provide the information needed to strategically plan for change. In a study of 20 nondiversified companies, profitability was greater when executives had an accurate perception of industry volatility. A study of 65 organizations concluded that active participation by top leaders in monitoring the external environment was associated with a more accurate perception of the market.

When the environment is a major influence, organizations should develop intelligent systems that scan for threats and opportunities. Here are some questions likely to be important to your organization in these hard economic times:

• What do clients and customers need and want?
• What is the reaction of clients and customers to the organization’s current products and services?
• Who are the primary competitors?
• What strategies are they pursuing?
• How do competitors’ products and services compare to ourorganizations products and services?
• What events affect the acquisition of materials, energy, information, and other inputs used by our organization to conduct its operations?
• How will our organization be affected by new legislation and by government agencies that regulate its activities?
• How will new technologies affect our organization’s products, services, and operations?
• How will our organization be affected by changes in the economy?
• How will our organization be affected by changing population demographics?
• How will our organization be affected by international events?

There are several guidelines leaders can use to monitor the external environment. First, identify the relevant information that needs to be gathered. Look for timely information about specific sectors of the environment on which the organization is most dependent and for competitor performance. Second, use multiple sources of relevant information. For example, informal network contacts, journals, newsletters, trade and professional publications, and government reports can help avoid biases. Interpretations are likely to be more accurate if many people are involved in the process. Third, learn what customers want and need. Market surveys are a common source of information. Fourth, learn about the products and services of competitors. This information provides a basis for evaluating your own organization. Fifth, link environmental information to strategic plans. Use the information to measure the relevance of current goals.