The External Environment of an Organization: a Management Perspective - Research Paper Example

 Introduction Human development and advancements have been founded on the bedrock of many an invention and the evolving of new technologies. The spread of their influence and the pace at which they have occurred were however dependent on the innovations of the modern discipline of management and continue to be so. According to Knights and Willmott, 2007, p.259, “Management has been celebrated as a modern invention whose importance and impact is equivalent to the most influential of world-changing technologies.” Management as a modern invention has not remained static, but has evolved and changed over time, given the understanding that “effective managerial behaviour” cannot remain the same under all circumstances and situations (Griffin, 2012, p.20). Starting from the days of scientific management of Frederick Taylor and the assumption that output could be maximised by the personal gain of workers, management thought has moved on to incorporate other needs of employees in terms of leisure time, status, social acceptance, etc. Events of dramatic proportions in society or the environment in which business organizations operate also have their upheaval on the management of business organizations. For instance, the successfully growing business organization of Cisco Systems under an autocratic management style reacted to the terrorist attacks and recession in 2001, to change to a democratic management style. Innovations in management theory and its practice have become even more important in the recent times, because of the issues and challenges that have emerged in the environment in which business organizations operate (Griffin, 2012). From Damanpur & Schneider, 2006, we understand that though environmental effects and demographic characteristics do have an impact on the application of innovative management thought in business organizations, it is however, the attitudes of managers that have a stronger influence on the development and implementation of innovative management strategies in the face of challenges, thus emphasizing the role of managers in the manner in which organizations perceive and react to the changes in the environment. . The Environmental Domain From the broadest perspective, organizational environment comprises all of the things that are outside of the organization. Such a perspective however, is self-defeating, as it is infinite and conveys hardly any useful information to the practice of management. Daft, Murphy & Willmott, 2010, p.140, provides a more comprehensible definition of organizational environment as “all elements that exist outside the boundary of the organization and have the potential to affect all or part of the organization.” Several sectors with similar elements that have the potential to affect all or part of an organization are easily identifiable. They are industry, raw materials, human resources, financial resources, market, technology, economic conditions, government policies and regulations, socio-cultural elements and international elements. When we consider the external domain of an organization, it pertains to the organization niche and the specific external sectors that organization chooses as important to it and hence interacts with it, for the purpose of achieving the objectives of the organization. In this regard the environment of an organization is thus selected and interpreted by the managers in an organization. Through this some features of the external environment have greater emphasis to the neglect of the others. Thus, the domain of organizational environment is dependent to a large extent on the choice of the managers. There are two dimensions that play a significant role in this choice. There are some factors over which the managers have limited choice and control, for instance, the state of the economy. The second dimension pertains to the established attitudes and agendas of the managers (Daft, Murphy & Willmott, 2010). Recalling Damanpur & Schneider, 2006, the attitudes of managers have a strong influence on the construct of the environment of an organization. This means the external environment can be interpreted in different ways. For example, managers at Nokia, perceived their environment in such a manner, as to lay their emphasis on smart phones, neglecting the middle market. Managers at Samsung, however, read the environment differently, which allowed them to exploit the vacuum left by Nokia in the middle market (Daft, Murphy & Willmott, 2010). Many of the sectors in the general environmental domain of business organizations are beyond the control of the managers, but have a strong indirect influence on the fortunes of an organization. Furthermore, many of them change rapidly, requiring organizations to cope with these changes, because of the indirect influence. Sectors that have witnessed rapid changes in the environments of business organizations are technology from the rapid advances in technology, markets from the changing face of competition due to globalization and economic conditions from recessions that frequent visit the economy. For example, advances in technology led to the availability of different advertisement media that advertisement companies had to cope with in the New Millennium. Added to this change was the economic recession in 2001, subsequent to the terrorist attack in September, 2001. Ogilvy and Mather, the leading advertisement company, was faced with this combination of technological advances which led to fragmented media and changing behaviour of their customers and the weak economic conditions. Innovative management initiatives were the need of the hour to overcome the consequences of the changes in the general environment. Ogilvy and Mather chose the path of downsizing and restructuring to cope with the challenges in the general environment. Changes in the environment were bringing into play management strategies that did away with long drawn plans and instead strategies that were essential to cope with rapid and influential changes in the general environment of organizations (Daft, Murphy & Willmott, 2010). In the modern age organizations are buffeted by the winds from a highly unstable and unpredictable environment on a regular and frequent basis. Thus, the need for change to overcome this challenge from the environment is a constant pressure on managers. Anecdotal experience from business organizations demonstrate that these changes are in the form of downsizing, re-engineering, flatter organizational structures, global expansions and employing sophisticated technologies. Irrespective of the change modality that is used, change is the buzzword and managers have to have a sound and clear picture of the theories of change and the effective practices for implementing change (Waddell, Cummings & Worley, 2011). Learning and development are a continuous process for managers both in terms of their professional practice and in terms of their individual selves. The key factors here in this aspect in this central learning process is innovative thinking and perceiving the emerging trends in management theory to acquire the knowledge and skills to cope with the diverse set of organizational situations arising from the constant churning in the environment of the organization (Watson, 2001). Meeting the Challenges of the Environmental Domain Daft, Murphy & Willmott, 2010, p.148, provide us with the concept of stable and unstable dimensions, which “refer to whether elements in the environment are dynamic. An environment is stable if it remains the same over a period of months or years. Under unstable conditions, environmental elements shift abruptly.” The characteristic feature of the modern business world is volatility or a fast-shifting environment. In other words the environment of the modern business world is unstable. Many factors contribute to this unstable nature of the business environment. These factors include rapid advances in technology or changing markets from globalization. Changing economic factors in the form of credit crunch and the subsequent recession in the developed world or steep rise in prices of oil and other raw materials are also contributing to the unstable environment in the business world. The environment of public utility companies may be considered as stable, from the standpoint of the demand and supply remaining fairly stable and their functioning in a regulated environment. Toy companies on the other hand may considered as functioning in an unstable environment due to competition arising from globalization, changes occurring at the retail front due to the emergence of hypermarkets and technological advances resulting in market encroachment from video games. However, stable environments for organizations are fast disappearing, which may move stable environments into organizational development history pages, as even public utilization are seeing transformation in business processes and the loss of monopoly in their markets (Daft, Murphy & Willmott, 2010). Management strategies that target success and growth differ depending on the state of the environment at any given time. Mason 2007, investigating the effect of the external environment on management and strategy, suggests that when the environment of the business world is stable, more successful organizations have been found to rely more on traditional management theories, practice and strategies that emerge from formal strategy planning activities. However, when the business environment is unstable such traditional management theories, practice and strategies do not contribute to success in attaining growth objectives. Instead successful organizations in turbulent environment situations have been found more to rely on innovative, quick and disruptive strategies. These strategies do not come from traditional formal planning activities, but rather from bottom up democratic processes, which is organic, self-organising, adaptive and emergent in nature (Mason, 2007). There is a single unifying characteristic of all the environmental influences on business organizations, which is uncertainty. In the absence of accurate information on environmental factors, there is difficulty in working out the impact of these environmental factors on the organization, leading to environmental uncertainty. Environmental uncertainty is assumed to arise from the factors of complexity and dynamism in the environment. Environmental complexity is based on the quantum of environmental components that have are capable of influencing the outcomes of the organization, while environmental dynamism is the extent to which the impacting environmental factors change. When there is a high degree of environmental complexity and environmental dynamism or just one of them, there is an ensuing high degree of environmental uncertainty. Organizations In low environmental uncertainty environments will find themselves in environments which are marked with steadiness and stability, while organizations in high uncertainty environments will find themselves in environments that are marked by turbulence and instability. For instance, there is turbulence and instability in the environment of the healthcare industry, brought about by the changes in regulations through the new health care bill in the USA (Griffin, 2012). Uncertainty theories attempt to provide an understanding of the interaction between organizations and their environments, which is particularly pertinent to the response of organizations to turbulent or unstable environments. Researchers into uncertainty have given a lot of interest to the variable of environmental uncertainty or perceived environmental uncertainty in the interaction between organizations and their environments. It is environmental uncertainty that is the fundamental problem that organizations need to address, with particular emphasis on turbulent or unstable environments (Milliken, 1987). Milliken 1987, p. 133 provides us with three types of perceived environmental uncertainty for organizations. These three types are state, effect and response uncertainty. State uncertainty is present in an environment when the environment or a portion of the environment cannot be predicted. For example, the global financial crisis of 2008 led to economic recession in the developed world, thus bringing about a change in the economy element in the environment of business organizations. A large degree of unpredictability persists in environment as a result of this, as even today the course and outcome of the recession continues to impact on the world, with no definite understanding of when and how this economic aspect in the environment of business organizations will return to normality. The response of managers to predict the impact of specific changes in the environment on the organization results in effect uncertainty. Consequently there is a response from the organization to the specific change in the environment, but there is inability to predict the result of the response, which leads to response uncertainty (Kreitner & Mohapatra, 2008). There is an appealing logic in this differentiation of the environment into three types of uncertainty for managers. While it is not difficult to make a meaningful distinction between the three constructs of uncertainty in the environment, the more difficult task is in the measurement of the three constructs of uncertainty in the environment. Irrespective of this, constant monitoring of uncertainty in the environment of an organization is essential, to bring about the required changes in the functioning and business processes of a business organization, for it to be successful in an ever changing or dynamic business environment (Ashill, 2010). Lessons from the Global Financial Crisis Alan Greenspan, the former Chairman of the Federal Reserve of USA, on October 8, 2007, had this to say as an explanation for missing the housing bubble in the USA that was the prelude to the subsequent global financial crisis in 2008, “We can’t figure this out. I’ve been in the forecasting business for 50 years, and I am no better than Lever was, and nobody else is either” (Patton, 2011, p.133). In complex and turbulent environments, there is a limit of knowledge, heightening the degree of unpredictability and uncontrollability on processes and outcomes. Uncertainty in interventions and unpredictability in outcomes can intertwine to produce reverberations around the world from which no program or organization is insulated. In other words the global financial crisis has given rise to turbulence in the environment of organizations and is reflected by the three constructs of uncertainty, namely, state uncertainty, effect uncertainty and response uncertainty. The greatest lesson for management form the Global Financial Crisis is the confirmation of the importance of the theoretical constructs of uncertainty impacting on the manner in which the general elements in the environment of an organization have an influence on the well-being of organizations and the evaluation and response of organizations to the turbulence in the environment. While earlier single sectors of industry have demonstrated this, the Global financial Crisis starting in 2008 has demonstrated this in a global manner. Prior to the Global Financial Crisis, financial managers’ believed that they were knowledgeable of the risks, had containment measures in hand that would be adequate to contain any turbulence, neglecting the possibilities of complexity and uncertainty, or the lack of perceived uncertainty. Consequently, there was hardly any constant monitoring of the environment and immediate responses to perceived changes, relying on long term strategies to contain any turbulence. This lack of cognizance of uncertainty in an element of the business environment of organizations has made the world to pay a heavy price, which it still continues to do (Patton, 2011) Evaluation of the triggers for the financial crisis shows that the belief of financial managers that turbulence in the economy of the world could be avoided by a long term strategy of low interest rates, even when the interest rates were brought close to zero. This was based on the surmise that lower long term interest rates were a boon to business organizations in their growth outlook and the ensuing benefits to workers. For example, the Bank of Japan lowered its interest rates in 1992 to below 2%, with a subsequent slide to 0.1% by the year of 2001. In the case of USA, where the financial bubble burst, the Federal Reserve Bank dropped its interest rates to 0.75% and by December 2008, the Federal Reserve bank interest rates were down to 0,25%. This long term strategy for promoting business organization growth, through lowering of interest rates in the complex and uncertain financial markets was sure to have its repercussions. The issue is that even adequate short term monitoring of this strategy was seldom done and when done appropriate responses were not put in place to contain any unwanted fluctuations in the financial markets. In other words, financial managers at many of the developing countries central banks put in place a long term strategy and sat back to enjoy what they believed would be the perceived benefits from such a strategy. When things went awry there were delays in coming to grips with the situation and no contingency plans to offset the negative impacts of such a financial strategy. In other words, the long term strategy in the complex and uncertain financial world and the absence of constant monitoring for introducing contingency plans, should it be needed, lay behind the disaster of the financial crisis in 2008. The lesson here is that in turbulent and unstable environments long term planning and strategies have a negative impact and it is short term planning activities with appropriate monitoring of the influencing factors that provide a solution for managers in complex, turbulent and uncertain situations (Heinsohn & Decker, 2010). Conclusion Management is an innovative modern discipline, with managers playing a significant role in influencing the manner in which the factors in the environment of an organization impact on the organization. While everything external to an organization may be considered as the external environment of an organization, from a management perspective, it is only the external factors that have the potential to impact on the organization that are considered as a part of the external environment. Thus, sector of industry, raw materials, human resources, financial resources, market, technology, economic conditions, government policies and regulations, socio-cultural elements, and international elements constitute the external environment of the organization. In the modern age organizations are buffeted by the winds from a highly unstable and unpredictable environment on a regular and frequent basis. Thus, the need for change to overcome this challenge from the environment is a constant pressure on managers. It is the lack of stability in the external environment that is responsible for the constantly changing environment of an organization and the area of concern for managers. It is the complexity and the uncertainty of the external environment that poses challenges to managers in coping with the frequent changes in the external environment. Uncertainty pertains to three dimensions, namely the dimension of state uncertainty, effect uncertainty and response uncertainty. This means that the complexity in the environments results in managers not being sure of the state of the environment, the effect of the environment of the organization and the response measures to be undertaken by the organizations. In stable environments long term planning activities and strategies have yielded desired results, but in unstable environments constant monitoring of the environment and short term planning strategies based on the results of this monitoring is what can deliver the desired outcomes through responses to changes in the environment. The Global Financial Crisis reinforces the complexity, dynamic and uncertainty concept of unstable environments and that organizations that maintain a short term vision of the horizon in a changing environment are the organizations that are better equipped to face the turbulent and unstable environments that are more the rule in this modern age. Literary References Ashill, N. J. (2010). Measuring State, Effect, and Response Uncertainty: Theoretical Construct Development and Empirical Validation. Journal of Management, Vol.36, No.5, pp.1278-1308. Daft, R. L., Murphy, J. & Willmott, H. 2010, Organization Theory and Design, South-Western Cengage Learning, Mason, Ohio. Damanpur, F. & Schneider, M. 2006, Phases of Adaption of Innovation in Organizations: Effects of Environment, Organization and Top Managers. British Journal of Management, Vol.17, No.3, pp.215-236. Griffin, R. W. 2012, Fundamentals of Management, Sixth Edition, South-Western Cengage Learning, Mason, Ohio. Griffin, R. 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