Walking through the Storm: Discussing the Nature of the Organizational Environment

Two Contradictory Views on the Nature of the Organizational Environment

Numerous changes are happening all around organizations. In order to cope with these changes and even thrive on them, organizations are forced to adjust to their environments relentlessly. Hence, two major questions coming to one’s mind would be “Has environment always been subjected to this amount of changes or have changes started pilling up at higher pace at some specific moment?” and “What is the nature of organizational environment – is it really that unstable and complex to be called discontinuous?” 

Nowadays, we hear over and over again that organizations are facing the unprecedented level of turbulence in their environments, and that this turbulence has become a major driving force that dictates strategic responses necessary for success. According to these voices, changes are becoming more intense, their frequency is getting higher, and their velocity is on an ascending trajectory. 

Although the concept of environmental turbulence has gained significant attention from many authors in the last few decades, numerous scholars and practitioners disagree with this concept. For example, Schon and Nutt (1974) stated that “turbulence is the perception (both personally and generally) of the absence of clear and stable paths, guideposts by which to make sense of issues in order to propose and achieve resolutions” (p. 181). Mintzberg (1994) went even further by claiming that “to pronounce any environment permanently turbulent is as silly as to call it permanently stable: environments are always changing in some dimensions and always remaining stable in others; rarely do they change all at once, let alone continuously (and, in any event, rarely are those who experience them the best judges of the degree of their change)” (p. 207).

Introducing Dimensions of the Organizational Environment

In order to try to resolve this conundrum, we will first introduce two dimensions (or attributes) that will help us describe and analyze the nature of organizational environment. These dimensions are stability/instability and simplicity/complexity (Emery and Trist, 1965). In our view, stability/instability dimension is concerned with changes in the environment. It is positioned on the stable-dynamic continuum described by three environmental parameters: (1) speed of change, (2) frequency of change, and (3) intensity (magnitude) of change. The speed of change is a time interval in which the change (deviation) in environment reaches its peak. Frequency is the number of changes per unit of time, while intensity is the amplitude of the change. This perspective on stable-dynamic dimension builds on D’Aveni, Dagnino and Smith’s (2010) argument and Suarez and Oliva’s (2005) concept. It is obvious that an increase in the speed, frequency or intensity of change would lead to the increase of environmental dynamics. 

On the other hand, dimension of simplicity/complexity depicts the breadth and depth of knowledge and skills required to understand the organization’s environment in order to be able to cope with it. This dimension also consists of three environmental parameters: (1) number of elements (factors) in the environment, (2) interdependence of these elements, and (3) internal complexity of each element (required knowledge to understand this element, i.e. the number of sub-elements and their interdependence). An increase in the number of elements, their interdependence, and complexity of each element requires an increase in the breadth and depth of knowledge and skills required to understand the environment, i.e. increases the complexity of the environment.

In this article, we argue that organizational environment has (more or less) always been subjected to numerous changes. Some of these changes have had a profound impact that completely altered the competitive landscape. Think of the mass production using assembly line technique introduced by Henry Ford at the beginning of the 20^th century, the Great Depression that took off from US in 1929, the WW2 taking place in 1939-45, or the invention of Internet in the second half of 20^th century. All these changes have had unprecedented consequences for organizations in various industries all over the world. Therefore, instability or change is hardly a new trait of organizational environment. Even though some changes may arrive in high velocity, intensity or frequency, the most changes affecting organizations are taking place slowly and are not radical or too frequent, thus allowing organizations to spot them in timely manner and respond appropriately. 

On the other hand, an increase in complexity of organizational environment is something that is heavily influencing organizations around the world. This complexity increase is happening mostly due to the fact that our world is being more globalized with every day that passes and that technology development has advanced beyond a certain point, so now some events happening in one industry in a distant part of the world may influence actions of organizations operating in other industries in the other part of our planet. For example, we all remember the recession that started in US in 2007-08 in the banking and real estate industries and how it affected a lot of organizations around the world operating in various industries, such as: automotive, airline, travel and leisure, etc. Such immense interdependence was not conceivable just a few decades ago.

The complexity of contemporary environment is characterized by the existence of a large number of relevant factors affecting organizations, generally higher level of their internal complexity and increased interdependence among them. More specifically, organizational strategies and operations are now being influenced by ascending number of factors (usually hard to understand in detail) that are becoming inextricably intertwined among each other. 

Therefore, even though stability/instability dimension is not something managers should worry about now more than before, simplicity/complexity dimension is being on the move toward complexity end, and it is having significant implications on functioning of organizations and managing in general. This will be more evident when we turn our focus to the concept of “environment discontinuity”.

Continuous vs. Discontinuous Organizational Environment

Looking at the organizational environment through the prism of stability/instability and simplicity/complexity dimensions, we come to understand the concept of “environment discontinuity”. The environment discontinuity refers to any change in the environment an organization cannot cope with on the basis of its current capabilities and resources. Therefore, it must make some significant changes in its capabilities and resources in order to survive these sort of changes. Alternatively, it will cease to exist.

This means that changes in the organizational environment can be viewed as continuous or discontinuous depending on the current capabilities and resources of an organization. More specifically, the values of the dimensions of stability/instability and simplicity/complexity of the environment on one side, and existing capabilities and resources of an organization on the other, define whether the environment will be perceived as continuous or discontinuous. The same environment at the same time can be perceived differently from the aspect of various organizations that operate within it, because no two organizations are the same. These differences in the perception of organizations will affect their future actions.

For example, if we take a look at the retail industry, we will see that the majority of retail companies have similar strategies: they are slowly modifying its practices, trying to find best sourcing partners on a global scale, and are heavily focused on streamlining its operations and cutting costs. On the other hand, one of the best known retail companies, Amazon, has recently introduced its advanced shopping concept “Amazon Go” where customers do not wait in lines and have checkouts – they just take the items they need and leave the store. This concept represents a significant change in the environment of the retail industry that will most likely produce a shakeout among retail companies.

But if we stop for a moment and take a good look at this change, we may realize that it was a result of technological improvements in the areas of machine learning, computer vision and artificial intelligence. Now, if we take an even closer look at it, we may see that improvements in the areas already mentioned have been happening in small increments for a longer time period but nobody from the retail industry has been paying attention, except Amazon. Only Amazon has been able to connect the dots and, as a result, integrate these seemingly different technologies into one comprehensive technological system. In other words, introduction of Amazon Go is a product of relatively stable but complex environment that turned out to be discontinuous for all retail organizations except for one. The change has been happening for some time, but almost nobody noticed, because nobody had required knowledge and skills to see the relationship among different technologies.

The final product, Amazon Go, will probably eventually represent a very intense change in the environment that will have a huge impact on a great number of organizations working in different industries, not just retail. In other words, this innovative concept represents a serious threat to the prevailing business model in many industries, but especially in retail. Thus, Amazon has managed to set a high bar for other competitors and gain a significant competitive advantage over them. Time will tell how this discontinuity in retail industry will affect other retail companies.

With all this in mind, we can answer two questions asked in the introductory part of this article. As for the dynamics of changes concern, it is true that numerous changes are happening in the organizational environment, but it has always been like that – periods of relative stability punctuated by periods of instability. Changes alone usually cannot count for discontinuous environment.

On the other hand, when we introduce complexity of the environment into this equation, things get pretty complicated, and here comes discontinuity in play. Changes in some aspects of the environment may produce unexpected changes in many other aspects, which in turn may jeopardize the ability of an organization to survive. An organization must produce specific actions to develop its competencies and resources in a proper direction in order to cope with the discontinuity. Hence, to answer the second questions – the nature of organizational environment may be discontinuous, but it depends on organizations’ current capabilities and resources and is mainly a product of increased complexity of the environment, not just of changes themselves. In complex environment, changes get magnified and multiplied in non-linear way, which makes the resulting impact on organization hard to predict. These changes usually catch an organization unprepared and off guard or organization is simply ill equipped to deal with them. Examples include sudden stock market collapses, deep economic recessions, unexpected shifts in political directions, or unannounced regulation changes. 

Implications for Managers

The nature of contemporary organizational environment really complicates the job and responsibilities of managers. Due to its increased complexity, managers have to stay alert and pay attention to a much larger number of factors in the environment than was the case earlier, which puts enormous pressure on them to relentlessly improve their knowledge and skills. Whatever change managers face, their ultimate responsibility is to anticipate the consequences, define, communicate and coordinate appropriate responses, monitor execution of actions and its effects, and make modifications accordingly. In other words, the primary focus of management is on securing appropriate organizational alignment with changes in the environment (or even creating changes for others to adjust).

However, a great obstacle for organizational adjustment to the changed environmental circumstances often stems, not from managers’ inadequate knowledge and skills, but from an inability of top management to perceive the environment in an objective manner. Cognitive limits and bounded rationality are preventing top managers from developing a complete understanding of their environments (Daft and Weick, 1984; Bogner and Barr, 2000). Instead, top managers develop subjective representations of their environments, which drive their strategic decisions and actions. In this way prevailing managerial paradigm affects the process of strategy making.

In other words, individual differences influence not only how the organization’s environment is perceived by managers but also how the process of strategy formulation will unfold (Dess and Origer, 1987). The relationship between environmental context, managerial cognition and strategic action has been proved by Nadkarni and Barr (2008). Their results confirmed the mediating role of managerial cognition: environmental velocity influences top managers’ attention focus and causal logic, which in turn, influences speed of strategic response to major changes in the environment.

Thus, the nature of organizational environment heavily influences managerial decisions and organizational actions. Therefore, more profound understanding of the nature of organizational environment is a must for all managers motivated to lead and develop organizations in the long run. This can be achieved only by systematically analyzing stability/instability and simplicity/complexity dimensions of the environment, as well as mapping and analyzing the influence of various environmental changes and factors on the organization. Creation of different response scenarios, accompanying simulations, and selection of the optimal alternatives should follow.

We live in a dynamic world. Always have been and always will be. Therefore, coping with changes and thriving on them will remain the only permanent requirement for organizations in the foreseeable future. Everything else will probably be subjected to changes.

Derived from passages in the article:

Stefanovic, I., Prokic, S. and S. Vujovic (2012). The Organizational Environment Dimensions Revisited: Analysis of the Contemporary Context, Transformations in Business & Economics, Vol. 11, No. 1, pp. 124-138.

References:

Bogner, W. and P. Barr (2000). Making Sense in Hypercompetitive Environments: A Cognitive Explanation fot the Persistence of High Velocity Competition, Organization Science, Vol. 11, No. 2, pp. 212-226.

D’Aveni, R. A., Dagnino, G. B. and K. G. Smith (2010). The Age of Temporary Advantage, Strategic Management Journal, Vol. 31, pp. 1371-1385.

Daft, R. L. and K. E. Weick (1984). Toward a Model of Organizations as Interpretive Systems, Academy of Management Review, Vol. 9, No. 2, pp. 284-295. 

Dess, G. G. and N. K. Origer (1987). Environment, Structure, and Consensus in Strategy Formulation: A Conceptual Integration, The Academy of Management Review, Vol. 12, No. 2, pp. 313-330.

Emery, F. E. and E. L. Trist (1965). The Causal Texture of Organizational Environments, Human Relations, Vol. 18, February, pp. 21-32. 

Mintzberg, H. (1994). The Fall and Rise of Strategic Management, Harvard Business Review, Vol. 72, No. 1, pp. 107-114. 

Nadkarni, S. and P. S. Barr (2008). Environmental Context, Managerial Cognition, and Strategic Action: An Integrated View, Strategic Management Journal, Vol. 29, pp. 1395-1427.

Schon, D. A. and T. E. Nutt (1974). Endemic Turbulence: The Future for Planning Education, Chicago: American Institute of Planners. 

Suarez, F. F. and R. Oliva (2005). Environmental Change and Organizational Transformation, Industrial and Corporate Change, Vol. 14, No. 6, pp. 1017-1041.