External Factors and Organizational Strategy

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Table of Contents

Introduction
Basic information on Strategy and Environment
Relationship between the External Environment and Strategy
Influence of the External Environment on Strategy
Conclusion
References

Introduction

The external environment of an organization plays an important role when it comes to the strategic management of an organization’s activities. While many managers focus on the various internal dimensions of an organization, they rarely place the same emphasis on the external environment which is usually at times dynamic, fast-changing and volatile.

The external environment of an organization is usually made up of the political, economic, social and technological factors which in one way or another affect the functions and operations of an organization (Witcher and Chau 2010).

An analysis of these factors is important for an organization as it will allow the managers to develop strategies that will allow the organization to deal with any changes that might exist in the external environment.

Strategy which is an important part of a company’s operations refers to the means used by the company to achieve the long term objectives and goals that have been set.

Strategies are the actions which are used by managers to direct the functions of employees so that the goals and objectives of the organization can be achieved. Strategies are important for an organization because they affect the long-term prosperity and functionality of the organization (Goldman and Nieuwenhuizen 2006).

Managers have to develop strategies that are future oriented to ensure they reflect the vision of the company. Because of the multifunctional consequences they have on business operations, the internal and external factors have to be considered when developing suitable strategies for the organization (Mason 2007).

Many studies have been conducted on the factors that make up the external environment of an organization (Canzer 2006) as well as strategic management for company managers (Sadler and Craig 2003). There however exists limited research on the relationship between these two aspects.

The current research will seek to review previous and current research that will shed more light on the relationship that exists between an organization’s external environment and the strategy developed by the organization to achieve its long term goals.

The study will provide a review of the existing research conducted on the relationship between external factors and organizational strategy.

Basic information on Strategy and Environment

Based on the classical Chandlerian view developed by Chandler in 1962 on organizational strategy, structure and the environment, Chandler was able to note that the environment of an organization determined the strategy that would be formulated by the organization’s players which in turn determined the structure of the organization.

Chandler basically proposed that environment, strategy and structure were concepts that were directly related to each other. However this line of thought changed with modern researchers such as Hall and Saias and Whittington et al (1999 cited by Wiegl 2008) who noted that strategy, structure and environment were different constructs.

The above mentioned researchers were able to note that the existing inter-organizational structures determined the type of capacity an organization had to develop specific strategies that would reflect the conditions of the external environment.

The researchers noted that both strategy and structure were usually influenced by the external environment. Managers therefore had to adapt their decisions to reflect the goings on of the external environment thereby ensuring that the internal environment of the organization was able to respond to the external environment of the organization.

Miles and Snow, Pfeffer and Salancik, Mintzberg and Starbuck who all conducted their studies on the relationship between the environment and strategy in the 1970s were able to argue that the environmental conditions of an organization had to be taken into account when investigating the types of strategy that existed within an organization (Weigl 2008).

Scholars in the field of strategic management have been able to conceptualize the external environment of an organization as one of the major constructs that can be used to understand the strategic management activities of an organization.

According to Hall and Tolbert (2005 cited by Weigl 2008) the environment of an organization is referred to as any external or internal phenomena that influences the performance of an organization.

The external phenomena include factors such as political, socio-cultural, economic and technological factors while the internal phenomena included factors such as the employees, organizational structure and managers of an organization. These phenomena according to Hall and Tolbert played an important role in strategy decision making within an organization.

Hall and Tolbert noted that the internal and external factors that affected the performance of a business pointed to the fact organizations in general do not exist in a vacuum.

The factors that existed in the organization’s environment were usually used to develop the strategy of the organization and these factors fell into the three environments of an organization which include the macro-environment, the operating environment and the internal environment (Wiegl 2008).

The factors that exist in the macro environment include economic, social, political and legal factors while the factors that exist in the operating environment include regulatory agencies, competitors, customers and stakeholders of the company.

The factors that exist in the internal environment include trade unions, board of directors, employees and the managers of the company. These factors have proved to be important when developing strategies and strategic decisions that will be used by the organization in its operation.

Previous documented research from scholars such as Ansoff, Lawrence and Lorsch who all conducted their studies in the 1960s have been able to reveal that there is a contingent relationship between the environments of an organization and strategic decision making (Weigl 2008).

Strategic management scholars such as Lenz and Engledow (1986 cited by Weigl 2008) were able to note that the type of strategic plan adopted by an organization had the ability to influence the external environment in which the organization operated in.

Such a theoretical perspective meant that the creation and alignment of strategic decisions was a recurring process for organizations that were directly in contact with their environments.

According to researchers such as Tan and Tan (cited by Weigl 2008), the recurring interaction that took place between an organization’s environment and strategic adaptation was conceptualized as a continuously evolving cycle of the interdependence between environment and strategy.

Relationship between the External Environment and Strategy

As mentioned in the introductory part of this discussion, there exists abundant research on the external environment of an organization as well as strategy and strategic management which are all important concepts to an organization.

There have been however limited studies that have been conducted to explain the relationship that exists between the two. The most recent research conducted on this relationship is that done by Mason (2007) who was able to analyze the effect an organization’s external environment had on the development of strategy and strategic operations that would guide the business performance of the organization.

Mason (2007) primarily focused on the impact of the external environment on the choice managers made when developing strategic management activities.

The findings of his study revealed that companies which operated in dynamic, volatile and rapidly changing external environments normally developed fast and radical strategies that would respond to this type of external environment.

In the case of organizations that operated in less turbulent external environments, Mason (2007) was able to note that organizations developed adaptive and less disruptive strategies that would respond to such an environment.

Wong (1991) who is among the few researchers to conduct a study on the relationship between the external environment and organizational strategy focused on how organizational strategies developed for manufacturers in the United States could be adapted to reflect the external environment.

Wong (1991) focused on the marketing, production, financial, distribution and logistical operations of the companies to ascertain whether the strategies developed for these functions were adapted to suit the external environment.

The findings of his study revealed that these operations were mostly affected by a dominant factor that existed in the external environment which was competition from foreign manufacturers.

The companies understudy were able to develop organizational strategies that would be able to accommodate foreign competition. Wong (1991) was able to note that while the manufacturing companies operated in the same industry, they had differing perceptions on the factors that exist in their external environments.

They all however maintained that the external environment affected the strategic operations and activities of an organization. Voiculet et al (2010) were also able to conduct a study on the impact of the external environment on the organizational development of strategy.

The researchers were able to note that the actions of factors which make up the external environment had a direct and indirect effect on the formulation of strategy within the organization. They were also able to note that an analysis of the external environment provided important information on how strategy formulation within an organization could be conducted.

Vioculet et al (2010) identified the two important external environments that affected how an organization’s managers developed their strategies and these were the macro environment and the operating environment of an organization.

As mentioned earlier the external factors that exist in the macro environment include economic, social, political and legal factors while the factors that exist in the operating environment include regulatory agencies, competitors, customers and stakeholders of the company.

These factors according to Vioculet et al (2010) proved to be important when developing strategies and strategic decisions that would be used by the organization in achieving organizational objectives and goals.

Influence of the External Environment on Strategy

Prescott in his 1986 study was able to provide important evidence on the way the external environment of an organization influenced strategy formulation and strategic management within organizations. Prescott (cited by Burke 2011) was able to note that the perceptions that most organizational executives had of the external environment directly affected their strategic decisions.

For example if the managers had a perception that the external environment was going to be volatile at a future date based on current conditions, they would develop strategies that would allow the organization to adapt quickly to these environmental conditions.

They therefore had to incorporate external conditions when making important strategic decisions that would determine the direction the organization would take in the future.

Plohart et al (2006) noted that how an organization perceived its external environment with particular focus on its strengths, weaknesses, opportunities and threats influenced the type of strategy that the organization’s managers were likely to pursue in that type of environment.

The researchers focused on how the external environment affected the staffing needs of organizations where past research revealed that staffing was a by-product of the strategy formulation process.

According to research conducted by Snow and Snell in 1993 (cited by Plohart et al 2006), organizations that operated within fast-changing and dynamic environments were forced to develop strategies that would allow them to adapt quickly to the prevailing conditions.

Based on Hall and Tolbert’s 2005 study, the interdependence that existed between strategy and the external environment demonstrated the type of mutual and dynamic relationship that existed between these two concepts.

Scholars such as Weick (1969 cited by Weigl 2008) explained the strategy-environment relationship by calling it the environmental enactment relationship meaning that organizations had to respond to the external environmental conditions for them to generate suitable strategic choices.

Such a reciprocal perspective offered an assumption that change within an organization was not an outcome of managerial adaptation or environmental selection, but it was rather a result of the external environmental and also the strategic adaptation chosen by the organization (Weigl 2008).

Consequently, scholars of strategic management noted that the strategy and environment of an organization were constructs that were related. Recent studies such as those done by Chan et al in 2006 on the strategy-environment relationship were able to reveal that alignment within an organization played an important role in adapting an organization to the external environment.

Chan et al were also able to note that organizations that operated in transition economies saw the influence of the external environment as an important asset especially when developing highly constrained and complex strategic decisions.

The external environment played an important part in influencing the type of strategic decisions that would be made by managers and other decision making authorities within an organization (Weigl 2008).

Conclusion

This review has focused on determining the type of relationship that exists between the external environment of an organization and its strategy. The review conducted on various literature and academic sources has been able to reveal that there exists a direct and indirect relationship between the two concepts.

The review has revealed that when formulating strategies, the strategic decision makers of an organization have to analyze the conditions that exist in the internal and external environment to ensure that the organization is able to adapt its operations to reflect those in these environments. The strategy-environment relationship is therefore important for an organization when it comes to making strategic choices.

References

Burke, W.W., (2011) Organization change: theory and practice. Thousand Oaks, California: Sage Publications.

Canzer, B., (2006) E-business: strategic thinking and practice. Boston: Houghton Mifflin Company

Goldman, G., and Nieuwenhuizen, C., (2006) Strategy: sustaining competitive advantage in a globalized context. Cape Town, South Africa: Juta and Company

Mason, R.B., (2007) The external environment’s effect on management and strategy: A complexity theory approach, Management Decision, Vol. 45, No. 1, pp.10 – 28

Plohart, R.E., Schneider, B., and Schmitt, N., (2006) Staffing organizations: contemporary practice and theory. New Jersey: Lawrence Erlbaum Associates.

Sadler, P., and Craig, J.C., (2003) Strategic management. London: Kogan Page Vioculet, A., Belu, N., Parpandel, D.E., and Rizea, I.C., (2010) The impact of external environment on organizational development strategy. MPRA Paper No. 26303. Available at: https://mpra.ub.uni-muenchen.de/26303/1/MPRA_paper_26303.pdf

Weigl, T., (2008) Strategy, structure and performance in a transition economy. Frankfurt, Germany: Gabler-Verlag Springer Science.

Witcher, B.J., and Chau, V.S., (2010) Strategic management; principles and practice. Hampshire, United Kingdom: Cengage Learning

Wong, Y.Y., (1991) Adapting organizational strategies to evolving environment: a multiple-case study of United States apparel manufacturers. Paper AAI9219393, Lincoln: University of Nebraska

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