External Environment and Organizational Structure Essay

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¶ … managers conceptualize the external environment. These frameworks have proven useful and call attention to the most important elements of the external environment. Today, these elements that managers are most likely to encounter are the economic, technological and political elements. Research has shown that while there is a tendency towards increased consideration of the external environment in organizational structure development, it is often a poor strategy decision. Organizational structure change can be traumatic for the organization and therefore should not be undertaken lightly, only in response to long-term trends in the external environment rather than the short-term shocks so frequent today.


Most management thinkers conceptualize the external environment with the use of models -- the PEST analysis or Porter's Five Forces model, or the opportunities and threats in the SWOT analysis. These models serve as a convenient framework that guides managers into seeking certain points of knowledge. These frameworks, whether used formally or informally; whether adapted or orthodox; form the underlying ways by which managers understand their environment. Whether the manager has a reactionary style or anticipatory style, they will utilize the information contained in such analyses in order to help make strategic choices for their company. This paper will explore these theories and their impact on organizational structure. The paper will then analyze the most prevalent factors in the external environment today and the adjustments that managers may make in response to the prevalence of these factors.

Conceptualizing the environment

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Michael Porter's influence on competitive strategy derives from his creation of simple models that explain how the external environment functions. His Five Forces model, created in 1979, is still relevant today for the accurate way in which it explains how the economic value in an industry is apportioned. Firms can adjust their strategy based on such a conceptualization, because the analysis not only leads to conclusions about the firm's immediate environment, but it also provides clues as to areas of the business where the competitive environment may be more favorable (Porter, 2008).

Essay on External Environment and Organizational Structure Assignment

The simplicity of management frameworks has resulted in their near ubiquity in business schools and as a consequence in practical management as well. As a result, other models have emerged. Where the Five Forces analysis is focused on the competitive environment, the PEST analysis focuses on other facets of the external environment. The Blue Ocean strategy orients the competitive environment is a different way from the Five Forces. Management theorists expound upon the virtues of each technique (Burke, van Stel & Thurik, 2010) or offer their own adaptations of these frameworks (Grundy, 2006) with the intent of making them more practical for real world management.

While these frameworks are widely taught, they may not be widely used. Yet, their influence is widely felt not for the least reason that they accurately reflect the ways in which real world managers conceptualize the environment. Academics and management gurus seek to translate the real world and its problems into neat models easily understood by managers. No matter which framework, model or technique the manager chooses, the ways in which the manager reacts to the information and insight gained can fluctuate wildly. Managers are ultimately guided in their decision-making by their own preferences, which in turn are influenced by their own competency, the organizational culture in which they operate and the constraints that they face.

Today's External Environment

We know from our models all of the common elements of the external environment -- political, legal, economic, technological, social, competitive, environmental at the very least. Managers today will face all of these, and the degree to which they face them will vary depending on the particular business, industry and country. In general, however, two or three of these have emerged as the most prevalent in the past decade or two, and presumably in the next decade or two coming up.

The first is the economic environment. Economic considerations drive business. There is simpler way to put it. Factors such as consumer consumption, government spending, business investment, exchange rates and interest rates have a profound impact on the decisions that managers make. Globalization -- the greatest economic trend of the past twenty or thirty years - has impacted managerial strategy profoundly. In addition to the complex political and human resources issues that arise from globalization, firms are increasingly international, multinational and even global in scope. This significantly increases the risk level that the firms face. Consider one growth economy in particular -- Thailand. At one point christened a new "tiger," Thailand has in the past fifteen years seen a currency collapse, a coup and now faces more political instability. Chunhachinda (2008) studied the issue of capital flight during times of political and economic stability in Thailand and found that during times of political instability capital flight occurs, resulting in economic losses for firms operating in that market. These findings could reasonably be extrapolated to much of the developing world. Yet, it is the growth prospects of the developing world, combined with the maturity of Western markets, that has spurred globalization. Managers thirty years ago had little reason to concern themselves with South-East Asian coups or which currency was collapsing in South America -- today they do. All global economies matter as businesses take on a global scope.

Another significant element in the external environment is the technological environment. Diffusion of capital around the world, increased emphasis on technology as a source of competitive advantage and dramatic improvement in the quality of telecommunications has resulted in a pace of technological change never before experienced in human history. As the result of this, managers may find that their strategies can no longer unfold over the course of years, but must be developed and implemented within months. Technology has, in effect, shortened the business cycle. Products reach maturity, are rendered obsolete and replaced with significantly improved variants in a span of a few years, in contrast to the pace of the business cycle throughout much of the industrial era. Technology shifts impact business in other ways, too, for example increasing productivity and decreasing hours worked (Gali, 1999).

Lastly, the third major element of the external environment most likely to impact on managers today is the political environment. Globalization is not just being fueled by improvements in the pace and type of global information diffusion. It has been crafted by the World Trade Organization and other non-governmental bodies. In addition, national, regional and civic governments set the terms for business. Oversight bodies analyze and approve proposed mergers, and new laws increase the regulatory burden adding costs to companies without adding economic value (Sarbanes-Oxley in the United States, for example). Despite the presence of economically conservative regimes in most of the Western world, the political/legal environment still has a direct impact on most managers today. Indeed, by setting the terms of competition within a given industry, the various levels of government have as strong an influence over the economics of an industry -- and therefore its behavior -- as any other external factor.

Impact of External Environment on Organizational Structure

Organizational structure is a response on the part of management to either the current external environment or the expected future external environment, depending on the temporal outlook of that individual manager. Consider the basic organizational structures -- functional, geographic and matrix. Each serves a particular purpose for managers, a response to a specific set of internal and external stimuli, the emphasis being on the external.

The common thread in all of the most important elements listed above is that they are important specifically because they are currently subject to intense and rapidly-paced change. Environmental factors can have a profound impact on the organization, necessitating organizational structure change. However, it is worth noting that organizations -- even the more adaptable ones -- are less likely to change than the elements of the external environment. In addition, the uncertainty and complexity of the organizational structure change process makes it risky. Managers are not likely to undertake the significant risk of restructuring their organizations in anticipation of organizational changes unless those changes are a near certainty -- for example a piece of legislation that has already been passed but has yet to come into affect.

Consensus among managers with respect to organizational structure change in the face of a rapidly changing external environment has not been reached. However, in Boyne and Meier's study (2009) of public service organizations, it was found that superior results are achieved by maintaining organizational stability. Changes were best made at the tactical level. Lin et al. (2006) also found that organizational structure change in response to shocks in the external environment had a negative affect on organizational performance. They found that the organization under such circumstances was forced to adapt not only to a new and uncertain market but was also simultaneously subject to organizational design traps and the needed phase of adjustment to the new organizational structure.

The ways in which managers adjust organizational structure to meet the external environment are varied. Certainly… [END OF PREVIEW] . . . READ MORE

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