How Does the External Environment Impact the Organizational Structure of a Firm?

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The strategies available to an organization are determined by its structure. Different strategies are better suited to different environments. Thus, if an organization is to thrive its structure must fit the business environment in which it develops. While there are no hard and fast rules, there are some environmental features that tend to have predefined effects on the organization.

Degree of Change

  • Some markets and environments change faster than others. A firm working in high tech, for example, needs to have a fast reaction time because its competitors are introducing new products all the time. In rapidly changing environments, organizations may find it difficult to stay up to date on all the changes and implications of its own operations and activities. Organizations in slow markets tend to have rigid, hierarchical structures, while those in changing markets are more adaptive: They can create new divisions to deal with emerging issues or delegate authority to the experts in a new technology.

Complexity

  • Complexity refers to the number and variety of interrelated factors that must be considered by the decision makers. A recycling center that buys scrap metal and sells raw iron is mostly concerned with just one variable: the cost of iron. Even if the scale of operations is big, one person alone can make most of the decisions. In contrast, international investment firms have a broader, more complex environment and must deal with the changing interest rates, tax policies and financial situations of several countries. The complex and profuse information available to decision makers requires decentralized management: There is not a single director but several specialists, each monitoring a specific area of the business environment.

Market Size and Resources

  • The term "munificence" refers to the resource abundance and the capacity to support growth. If the market does not support growth, organizations are likely to diversify. Conversely, they are more likely to specialize and remain focused in presence of new, growing markets. Because the market for video games is growing, there are many organizations specialized in making video games. In contrast, the market for typewriters does not support growth, so typewriter manufacturers must diversify and produce assorted office equipment.

Coping Strategies

  • Depending on their perceived capabilities to deal with this uncertainty, organizations may adapt one of three coping strategies: Some organizations know that they are too rigid, and will try to move into environments that change slowly or will try to slow down the change by asking for government intervention. Others are fast but lack vision, so they have to react to change by copying the actions and products of the market leader. Some are fast and proactive, meaning that they can see the signals and be ready for change before it happens and before their competitors have realized that the environment changed. Those organizations can defuse problems before they explode, and they are always ready to move into untapped markets an keep a leadership position.

References

  • "The Academy of Management Journal"; Dimensions of Organizational Environments: An Exploratory Study of Their Impact on Organization Structure; Rosalie L. Tung 1979
  • "The Academy of Management Journal"; A Causal Model of Linkages among Environmental Dimensions, Macro Organizational Characteristics, and Performance; Barbara W. Keats and Michael A. Hitt 1988
  • "The Academy of Management Journal"; Relating Porter's Business Strategies to Environment and Structure: Analysis and Performance Implications; Danny Miller 1988
  • Photo Credit Comstock Images/Comstock/Getty Images
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