An organization’s environment is composed of institutions or forces outside the organization that potentially affect the organization’s performance. These typically include suppliers, customers, competitors, government regulatory agencies, public pressure and the like.
Why should an organization’s structure be affected by its environment? Because of environmental uncertainty. Some organizations face relatively static environments few forces in their environment are changing. There are for example, no new competitors no new technological by current competitors or little activity by public pressure groups to influence the organization. Other organizations face very dynamic environments rapidly changing government regulations affecting their business, new competitors, difficulties in acquiring raw materials, continually changing product preferences by customers and so on. Static environments create significantly less uncertainty for managers than do dynamic ones. And because uncertainty is a threat to an organization’s effectiveness, management will try to minimize it. One way to reduce environmental uncertainty is through adjustments in the organization’s structure.
Recent research has helped clarify what is meant by environmental uncertainty. It’s been found there are three key dimensions to any organization’s environmental: capacity, volatility and complexity.
The capacity of an environment refers to the degree to which it can support growth. Rich and growing environments generate excess resources, which can buffer the organization in times of relative scarcity. Abundant capacity, for example, leaves room for an organization to make mistakes, while scarce capacity does not. In 2004, firms operating in the multimedia software business had relatively abundant environments, whereas those in the full service brokerage business faced relative scarcity.
The degree of instability in an environment is captured in the volatility dimension. When there is a high degree of unpredictable change, the environment is dynamic. This makes it difficult for management to predict accurately the probabilities associated with various decisions alternatives. At the other extreme is a stable environment. The acceleration in Eastern Europe and the demise of the Cold War had dramatic effects on the US defense industry in the 1990s. This moved the environment of major defense contractors like Lockheed Martin, General Dynamics and Northrop Grumman from relatively stable to dynamic.
Finally, the environment needs to be assessed in terms of complexity that is, the degree of heterogeneity and concentration among environmental elements. Simple environments are homogeneous and concentrated. This might describe the tobacco industry, since there are relatively few players. It’s easy for firms in this industry to keep a close eye on the competition. In contrast, environments characterized by heterogeneity and dispersion are called complex. This is essentially the current environment for firms competing in the Internet connection business. Every day there seems to be another new kind on the block with whom current Internet access providers have to deal.
Organizations that operate in environments characterized as scarce, dynamic and complex face the greatest degree of uncertainty. Why? Because they have little room for error, high unpredictability, and a diverse set of elements in the environment to monitor constantly.
Given this three dimensional definition of environment we can offer some general conclusions. There is evidence that relates the degree of environmental uncertainty to different structural arrangements. Specifically, the more scarce, dynamic and complex the environment, the more organic a structure should be. The more abundant stable and simple the environment, the more the mechanistic structure will be preferred.
Special organizational arrangements need to be made for fostering and utilizing entrepreneurship at times. Frequently, entrepreneurship is thought to apply to managing small business, but the concept can also be applied to large organizations and to managers carrying out entrepreneurial roles through which they initiate changes to take advantage of opportunities.