Understanding Organizational Environments: Forces, Types, and Impact on Structure

Posted on Aug 22, 2024 in Economy

ITEM 9. The Environment of the Organization

1. Concept of Environment

• The environment refers to all external factors that significantly influence business strategy but are beyond the company’s control.
• It encompasses external factors outside the organization’s control that impact its behavior and outcomes.

2. Classification of the Environment

• The general environment refers to the external factors surrounding the company from a broad perspective. It encompasses everything surrounding the company derived from the socio-economic system in which it operates.
• The specific environment refers to the factors closer to the company’s regular business operations. These factors specifically affect the sector, industry, or market in which the company operates.

• The macro (general environment) comprises all indirect forces influencing the organization. These forces are beyond the company’s control but are often powerful and significantly impact the organization. They are generic and exist independently of the company in the market, including economic, sociocultural, technological, political-legal, environmental, and international factors.
• The micro (specific environment) consists of all forces that directly influence or act upon the company. These forces include competitors, customers, suppliers, and human resources.

3. Environmental Forces Affecting the Company

Indirect Forces

These forces are part of the macro or general environment, encompassing factors that can indirectly influence the company. Identifying the geographical area where the company operates is crucial to limit the information needed for analysis. We can distinguish five levels of analysis: multinational, economic area (e.g., EU), national, regional, and local. The environment influences daily operations within a business organization.

Let’s analyze the factors of the macro environment (general environment):

• Economic Factors: Determined by the economic structure and situation of each country, economic conditions in the region where the company operates significantly influence it. These conditions are reflected in key economic indicators: unemployment rate, per capita income, inflation, interest rates, GDP growth, exchange rates, etc.
• Sociocultural Factors: These factors refer to the characteristics of the society in which the company operates, such as demography (birth rates and aging), education level, social unrest, lifestyle changes, religious, ethical, and ethnic aspects. These factors can lead to changes in the demand for products or services. The socio-cultural environment significantly impacts consumer buying habits and society.
• Technological Factors: Technological developments are not only the most rapidly evolving but also have the most significant scope to expand or limit opportunities for an established company. They relate to the ongoing process of technological innovation across all industries: the scientific and technical level, government and business policies in research, development, and innovation (R&D+i), the degree of technological innovation diffusion, knowledge protection, etc.
• Political and Legal Factors: There is a close relationship between politics and laws regarding taxation, employment, health and safety at work, product standards, and competition. In a global economy, these factors, in addition to economic factors, are crucial criteria for localization or corporate relocation.
• Environmental Factors: These factors relate to the company’s natural environment. There is increasing regulatory and social awareness due to the damage caused by some products and industrial processes. This increased awareness has led companies across sectors to introduce changes to their manufacturing processes and products, reducing pollutant emissions, using recyclable materials, etc. Environmental degradation and supply constraints are vital in preserving the planet.
• International Factors: These factors pertain to the performance of external factors in the countries with which the company interacts. The internationalization of the economy allows companies to transcend national borders to raise funds or market their products or services in other countries on more favorable terms, either by seeking economies of scale, reducing excess capacity, etc.

Three important issues arise when measuring the effects of the general environment:

• Variations in the general environment can have different effects on different industries.
• The impact of the general environment can vary significantly, even between companies within the same sector or industry.
• Not all variables affecting the general environment are relevant to a particular industry or company. Therefore, identifying relevant factors should be done on a case-by-case basis.

Direct Forces

These forces in the microenvironment directly impact the company. Four distinct groups are customers, suppliers, human resources, and competition (competitors). These factors constitute the organization’s operating environment and are characterized by specific and immediate implications for business strategy.

• Customers: Organizations offer their products and services not only to existing customers but also to potential customers, who can be individuals or organizations. It is essential to analyze customer consumption habits and tastes to anticipate future needs and maintain market share.
• Competitors: The second most crucial factor for analysis is the rivals the company faces in acquiring resources and customers. The company should gather competitive information to understand competitors, anticipate their future strategies and reactions to the company’s actions, and predict their future behavior. The goal of competitor analysis is to understand competitors and “put oneself in their shoes.”

A four-stage model involves identifying the following information:

1. Current strategy
2. Objectives
3. Their vision of the industry
4. Resources and capabilities

Identification of their Current Strategy

This is achieved by contrasting their statements and actions, although they are sometimes contradictory. The means of identification are:

• Websites, corporate messages, published interviews with their executives, conversations with customers, suppliers, and former employees.
• The launch of new products, pricing, promotion, and advertising campaigns are more reliable indicators.

Identification of their Objectives

A competitor’s behavior depends on their goals:

• Short-term return vs. long-term profitability
• Market share vs. market exclusivity
• Current markets vs. new markets

In the case of subsidiaries of a parent company, it is also necessary to examine the objectives of the parent company and the dependent relationships.

Identification of their Vision of the Industry

• To grasp how managers perceive competition, market forces, and key success factors.
• To analyze whether a different view of the business from our competitors provides clues to business opportunities.

Identification of Resources and Capabilities

Analyzing their financial strength, brand, production, and marketing capabilities allows us to evaluate the possibility of a real threat or opportunity.

Identification of Strengths and Weaknesses

Establish a strategy based on a sustainable long-term advantage.

• Suppliers: Their efficiency determines the efficiency of our business, the quality, and the price of our products/services. There is a possibility of downward vertical integration, meaning our supplier could become a competitor if they find our activity acceptable. For example, in the fashion industry, a brand sold in a department store might decide to resell its products independently, becoming a competitor to the department store. Companies like Pascual cannot ignore supermarkets like Alcampo and Carrefour. Although Pascual is a strong brand, it needs these supermarkets to sell its milk and achieve its sales targets.
• Human Resources: These are the people who provide the labor, energy, knowledge, skills, and experience that enable the survival and success of the business. It is essential to identify what motivates employees to get the best out of them, thereby increasing performance and productivity.

4. Types of Environments

Understanding the environmental characteristics with which the company interacts is essential. The type of environment and its behavior will determine the company’s attitude toward that environment. However, identifying the specific type of environment is complex due to the many variables to consider. We highlight three variables/measurement characteristics of the environment:

• Variability
• Complexity
• Hostility

Variability: This depends on the frequency of changes in environmental elements and their depth or importance. We can contrast stable and dynamic environments:

• Stable Environments: These environments have a low degree of uncertainty. For example, the staple goods or services sectors.
• Dynamic Environments: These environments have a high degree of uncertainty, making it difficult to establish organizational structures with appropriate pace and work intensity. For example, the telecommunications sector.

Complexity: This depends on the amount and variety of information needed for sound decision-making. The higher the number of elements or factors to consider, the greater the complexity of the environment. This allows us to contrast simple and complex environments:

• Simple Environments: These environments have a low need for information and little diversity. Few elements are involved, such as suppliers, types of customers, and competition, resulting in lower uncertainty. For example, a door manufacturing company.
• Complex Environments: These environments have a high need for information and are very heterogeneous. They require a high level of knowledge and skills for correct interpretation. Highly skilled personnel is needed to navigate the high degree of uncertainty. For example, technology or pharmaceutical companies.

Hostility: This refers to the threats the organization faces that can influence the achievement of its objectives. These threats can come from various areas, such as relations with the government, unions, customers, suppliers, and especially competition.

In hostile environments, there is a high threat of one or more of the following:

• Increased importance of uncertainty about changes
• Increased importance of the speed of adaptation to change

5. Environment-Structure Relations: The Design Variables

The design variables are:

• Differentiation = Specialization
• Formalization
• Centralization
• Perceived Environmental Uncertainty

Environment and Specialization (Division of Tasks)

The degree of specialization is mainly affected by the complexity of the environment. In particularly complex and turbulent environments, there is a tendency to design highly specialized positions to deal with specific sub-problems. Each activity is affected by specific elements of the environment, requiring a specialized approach to serve them better than a global perspective.

“Uncertainty of the environment and specialization”

Complexity of the Environment

Environment and Formalization (Rules of the Game)

In stable, less dynamic environments, companies must adapt to environmental conditions that are unlikely to change. In these environments, companies should choose formalized, bureaucratic structures characterized by predictability and control over results and behaviors. In contrast, in turbulent, dynamic environments, rules and regulations for activities are meaningless due to the need for continuous adaptation and adjustment to changing environmental conditions.

Environment and Centralization (Unifying or Sharing Decision-Making Among Several) → (How the Environment Influences Centralization)

Greater uncertainty forces companies to opt for decentralized structures. The dynamism, complexity, and hostility of the environment influence the organization by increasing the difficulty of the decision-making process. The amount of information and diversity of knowledge required to make decisions in turbulent environments limit the ability of top management to make appropriate decisions, so they need to delegate to their subordinates.

Hostility in Extreme Cases: In extreme hostility, re-centralization is used to coordinate a rapid response, centralized in a leader—one brain—for decision-making. All members know where to send information, authority is clearly defined, and less communication is required. Re-centralization is inconsistent in complex environments (decentralization) and is a temporary centralization prioritizing survival. If the situation continues for a long time without reconciling the opposing forces, it will result in the demise of the company.