External Environment & Organizational Structure
Businesses' external environment consists of competitive pressures, marketplace influences, government regulations and other uncontrollable, macroeconomic forces. Organizational structure is the formal layout of a company's workforce, showing managerial hierarchies, lines of decision-making authority and the physical grouping of employees. The external business environment can exert a number of pressures that can cause companies and industries to alter and adapt their organizational structures.
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Competitive Pressure
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The nature of the competition in a specific industry can have an effect on the organizational structure of all players in the industry. Consider an industry where companies make changes to their products frequently to stay relevant with customers. In this industry, companies will need the ability to make major product decisions quickly and frequently, making it helpful to structure organizations to center decision-making authority in a single individual or a small group. The same can hold true for industries with frequent price changes and promotional wars.
Consider the software industry, as an alternative example. Competitors in this industry release new products and new technologies frequently, making it necessary for companies to be continually innovative and place emphasis on research, development and idea-generation. These businesses can benefit from being structured with relatively few layers of management and employees who are empowered to try new things.
Legal and Political Factors
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The legal and political environment can have an effect on how employees and departments are distributed across countries around the world. Consider a company which does business in three different countries. If the employment tax rate is significantly higher in one country than the others, the company is likely to avoid locating any facet of their operations in that region.
Trade barriers, such as tariffs and import quotas, are an example of a political influence. These forces can cause a company to build new production facilities inside the countries they export to in order to reduce the total cost of their products. Both of these issues can cause a company to adopt a geographic organizational structure.
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Customers in the Marketplace
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The importance of customer service in an industry can affect whether companies in the industry favor a relatively tall or short organizational structure. Companies with only a small focus on customer service, such as paper towel manufacturers, can include more numerous layers of management to ensure that operations flow smoothly. Others, such as retail stores and restaurants, place a tremendous amount of importance on customer service, and front line employees need to be empowered to make decisions, such as giving cash refunds, making product exchanges and giving away free products.
Shareholder Pressure
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In some situations, companies can alter their organizational structure to appease stockholders' expectations. Expectations for profit margins, dividend payments and stock price targets can cause executives to restructure their operations to make their organizations more lean. This can lead to such sensitive challenges as outsourcing and downsizing, as positions are eliminated from the organization chart or moved to different geographic regions.
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