The Changing Environment

Uncertainty and Complexity of Organization's Environment

How does the environment influences an organization?

The patterns and events occurring in the environment can be described along three primary dimensions:

dynamism (whether events in the environment are stable or unstable),
complexity (whether the environment is simple or complex), and
abundance (amount of financial resources available to support the organization’s growth).

These dimensions are illustrated in Figure X-2.

Figure X-2 Factors Causing Uncertainty for the Organization

As the environment becomes less stable, and financial resources become less available, the level of uncertainty increases. These dimensions boil down to two essential ways the environment influences organizations:

the need for information about changes in the environment and
the need for resources from the environment.

The environmental conditions of complexity and dynamismOpens in new window create a greater need to gather information and to respond to changes based on that information.

The organization also is concerned with scarce financial resources and with the need to ensure availability of resources, which is discussed in a designated post hereOpens in new window.

Environmental uncertainty pertains primarily to those sectors illustrated in Figure X-1Opens in new window that an organization deals with on a regular, day-to-day basis.

Although sectors of the general environment—such as economic conditions, social trends, or technological changes—can create uncertainty for organizations, determining an organization’s environmental uncertainty generally means focusing on sectors of the task environment, such as how many elements (e.g., people, other organizations, events) the organization deals with regularly and how rapidly these various element can be analyzed along dimensions such as stability or instability and degree of complexity.

The total amount of uncertainty felt by an organization is the uncertainty accumulated across relevant task environment sectors. Organizations must cope with and manage uncertainty to be effective.

Uncertainty means that decision makers do not have sufficient information about environmental factors, and they have a difficult time predicting external changes.

Uncertainty increases the risk of failure for organizational decisions and makes it difficult to compute costs and probabilities associated with decision alternatives.

The business world is changing at an increasingly rapid pace. Staying alive in today’s business environment requires that managers stay alert.

Managers should always be looking at their competitors, broad industry trends, technological changes, shifting government policies, changing market forces, and economic developments.

At the same time, they work hard to stay in touch with what their customers really think and really want. By doing so, leaders can confront reality and be poised for change.

The sub-sections (remainder) of this entry will focus on the information perspective, which is concerned with uncertainty created by the extent to which the environment is complex and the extent to which events are dynamic.

Complexity

Environmental complexity refers to heterogeneity, or the number and dissimilarity of external elements (e.g., competitors, suppliers, industry changes, government regulations) that affect an organization’s operations.

The more external elements regularly influence the organization and the greater the number of other companies in an organization’s domain, the greater the complexity.

A complex environment is one in which the organization interacts with, and is influenced by, numerous diverse external elements.
In a simple environment, the organization interacts with and is influenced by only a few similar external elements.

For example, a family-owned hardware store in a suburban community is in a simple environment.

The store does not have to deal with complex technologies or extensive government regulations, and cultural social changes have little impact.

Human resources are not a problem because the store is run by family members and part-time help. The only external elements of real importance are a few competitors, suppliers, and customers.

On the other hand, pharmaceutical companies such as Abbott LaboratoriesOpens in new window, MerckOpens in new window, and PfizerOpens in new window operate in a highly complex environment.

They use multiple, complex technologies
Cope with numerous ever-changing governmental regulations
They are significantly affected by international events
They compete for scarce financial resources and highly trained scientists
They interact with numerous suppliers, customers, contractors, and partners
They respond to changing social values
They also deal with complex legal and financial systems in multiple countries

This large number of external elements in a drug company’s domain creates a complex environment. Other companies, such as MerckOpens in new window and Schering PloughOpens in new window, merged to better cope with uncertainty.

Dynamism

Dynamism refers to whether the environment in which the organization operates is stable or unstable. An environmental domain is stable if it remains essentially the same over a period of months or years.

Under unstable conditions, environmental elements shift rapidly. For example, an organization might experience major fluctuations in demand for its products or in prices charged by suppliers, competitors might be releasing better and faster innovations, or the regulatory environment for the industry might be undergoing rapid shifts.

Consider how the dynamic environment for fashion retailers such as Gap Inc.Opens in new window can cause a company to struggle.

Gap Inc. as Practical Example
“Gap’s brand is not terribly cool, and it’s overpriced,” said a young Los Angeles shopper. That’s a big change for the company that once controlled the U.S. market for casual fashion. One of the biggest challenges Gap managers face is that consumer preferences are changing rapidly and rivals have been quicker to address those desires. Gap follows the traditional model of ordering inventory at the beginning of the season and sending merchandise to the stores. If the clothes don’t sell, they linger on the racks and shelves, destined for a series of price markdowns until the next large order. All orders have to be approved at the corporate level. Rival Zara, on the other hand, follows a “fash-fashion” model, continually sending small batches of clothing to stores and seeing how customers respond. If the items sell well, the company can get additional products on the shelves within days. Zara employees or an agent can authorize new stock on the spot rather than having to submit orders to headquarters and wait for approval. Gap managers have implemented a few changes aimed at responding more quickly to the dynamic fashion environment. They now encourage employees to share information across the company’s different brands, such as Old Navy, Banana Republic, Athleta, and Intermix, so the company gets a better picture of what consumers are interested in. The CEO is also pushing data analytics so Gap can stay on top of quickly shifting trends. So far, though, Gap hasn’t found the right formula. One former customer who grew up wearing Gap clothes says the company keeps coming out with “the same thing, over and over again.” She says Zara has “styles that can fit any personality. Even their emails make me want to go into the stores.” In early 2019, Gap announced that it would close more than 200 stores over a two-year period and spin off the Old Navy brand as a separate company.

Gap Inc. as Practical Example

“Gap’s brand is not terribly cool, and it’s overpriced,” said a young Los Angeles shopper. That’s a big change for the company that once controlled the U.S. market for casual fashion.

One of the biggest challenges Gap managers face is that consumer preferences are changing rapidly and rivals have been quicker to address those desires. Gap follows the traditional model of ordering inventory at the beginning of the season and sending merchandise to the stores. If the clothes don’t sell, they linger on the racks and shelves, destined for a series of price markdowns until the next large order. All orders have to be approved at the corporate level. Rival Zara, on the other hand, follows a “fash-fashion” model, continually sending small batches of clothing to stores and seeing how customers respond. If the items sell well, the company can get additional products on the shelves within days. Zara employees or an agent can authorize new stock on the spot rather than having to submit orders to headquarters and wait for approval.

Gap managers have implemented a few changes aimed at responding more quickly to the dynamic fashion environment. They now encourage employees to share information across the company’s different brands, such as Old Navy, Banana Republic, Athleta, and Intermix, so the company gets a better picture of what consumers are interested in. The CEO is also pushing data analytics so Gap can stay on top of quickly shifting trends. So far, though, Gap hasn’t found the right formula. One former customer who grew up wearing Gap clothes says the company keeps coming out with “the same thing, over and over again.” She says Zara has “styles that can fit any personality. Even their emails make me want to go into the stores.” In early 2019, Gap announced that it would close more than 200 stores over a two-year period and spin off the Old Navy brand as a separate company.

As the Gap example shows, shifts in the environment, whether consumer tastes, new technologies, or competitor innovations, can cause a company to quickly fall behind. Sometimes specific, unpredictable events create unstable conditions for an organization.

In April 2019, for example, hackers posted the personal information of hundreds of FBI and Secret Service agents. Today, freewheeling bloggers, Twitterers, and YouTubers are a tremendous source of instability for scores of companies.

For example, when United AirlinesOpens in new window refused to compensate a musician for breaking his $3,500 guitar, he wrote a song and posted a derogatory music video about his lengthy negotiations with the company on YouTube. Word spread quickly across the Internet, and United just as quickly responded with a settlement offer.

Environmental domains are increasingly unstable for most organizations. Although environments are more unstable for most organizations today, an example of a traditionally stable environment is a public utility. In the rural Midwest, demand and supply factors for a public utility are stable. A gradual increase in demand may occur, which is easily predicted over time.

Toy companies, by contrast, have an unstable environment. Hot new toys are difficult to predict, a problem compounded by the fact that children are losing interest in toys at younger age, their interest captured by video and computer games, electronics, and the Internet.

Adding to the instability for toy makers is the shrinking retail market, with big toy retailers going out of business trying to compete with discounters such as Walmart. Toymakers are trying to attract more customers in developing markets such as China, Poland, Brazil, and India to make up for the declining U.S. market, but hitting the target in those countries has proven to be a challenge.

Framework

The simple-complex and stable-unstable dimensions are combined into a framework for assessing environmental uncertainty in Figure X-3. In the simple, stable environment, uncertainty is low. There are only a few external elements in a limited number of environmental sectors (e.g., suppliers, customers) to contend with, and they tend to remain stable.

The complex, stable environment represents somewhat greater uncertainty. A large number of elements (e.g., suppliers, customers, government regulations, industry changes, unions, economic conditions) have to be scanned, analyzed, and acted upon for the organization to perform well. External elements do not change rapidly or unexpectedly in this environment.

Figure X-3 Framework for Assessing Environmental Uncertainty

Even greater uncertainty is felt in the simple, unstable environment. Rapid change creates uncertainty for managers. Even though the organization has few external elements, those elements are hard to predict (such as shifting social trends or changing customer interests), and they react unexpectedly to organizational initiatives.

The greatest uncertainty for an organization occurs in the complex, unstable environment. A large number of elements in numerous environmental sectors impinge upon the organization, and they shift frequently or react strongly to organizational initiatives. When several sectors change simultaneously, the environment becomes turbulent.

A soft drink distributor functions in a simple, stable environment. Demand changes only gradually. The distributor has an established delivery route, and supplies of soft drinks arrive on schedule.

State universities, appliance manufacturers, and insurance companies are in somewhat stable, complex environments. A large number of external elements are present, but although they change, changes are gradual and predictable.

Toy manufactures are in simple, unstable environments. Organizations that design, make, and sell toys, as well as those that make electronic games or are involved in the clothing or music industry, face shifting supply and demand. Although there may be few elements to contend with—for example, suppliers, customers, competitors—they are difficult to predict and change abruptly and unexpectedly.

The telecommunications industry, the oil industry, and airlines face complex, unstable environments. Many external sectors are changing simultaneously.

In the case of airlines, in just a few years the major carriers were confronted with an air-traffic controller shortage, aging fleets of planes, labor unrest, soaring fuel prices, the entry of new low-cost competitors, a series of major air-traffic disasters, and a drastic decline in customer demand.

Within just a few years, four large airlines and many smaller ones went through bankruptcy, and the airlines collectively laid off 170,000 employees.

Remember This!
Changes in the environment can be described along three primary dimensions: dynamism (whether events are stable or unstable), complexity (whether the environment is simple or complex), and abundance (amount of financial resources available). The dimensions of dynamism (stable-unstable) and complexity (simple-complex) can be combined into a framework for assessing environmental uncertainty. For an organization in a simple, stable environment, uncertainty is low. There are only a few external elements (such as customers or suppliers) that the organization must deal with, and they change slowly. An organization that functions in a complex, stable environment experiences low to moderate uncertainty. There are a large number of elements the organization must deal with (such as customers, suppliers, government regulations, labor market, and raw materials), but they do not change rapidly or unexpectedly. An organization operating in a simple, unstable environment experiences moderate to high uncertainty. Although there are only a few external elements to contend with, these are hard to predict and may change quickly or unexpectedly (such as changing social trends). The greatest uncertainty occurs in a complex, unstable environment. The organization must deal with numerous external elements in various sectors of the environment and these elements may shift frequently and sometimes unexpectedly.

Remember This!

Changes in the environment can be described along three primary dimensions: dynamism (whether events are stable or unstable), complexity (whether the environment is simple or complex), and abundance (amount of financial resources available).
The dimensions of dynamism (stable-unstable) and complexity (simple-complex) can be combined into a framework for assessing environmental uncertainty.
For an organization in a simple, stable environment, uncertainty is low. There are only a few external elements (such as customers or suppliers) that the organization must deal with, and they change slowly.
An organization that functions in a complex, stable environment experiences low to moderate uncertainty. There are a large number of elements the organization must deal with (such as customers, suppliers, government regulations, labor market, and raw materials), but they do not change rapidly or unexpectedly.
An organization operating in a simple, unstable environment experiences moderate to high uncertainty. Although there are only a few external elements to contend with, these are hard to predict and may change quickly or unexpectedly (such as changing social trends).
The greatest uncertainty occurs in a complex, unstable environment. The organization must deal with numerous external elements in various sectors of the environment and these elements may shift frequently and sometimes unexpectedly.

The series:

Citation