Tweet

Conceptualizations Of Organizational Environmental Uncertainty

Guest post by: Dr. Fathi El-Nadi

Article Overview: In the management literature, the external environment can be broadly defined as “the totality of physical and social factors that are taken directly into consideration in the decision-making behavior of individuals in organizations” (Duncan, 1972, p. 314). Organizational researchers have long theorized that the overall environment consists primarily of several independent components (e.g. Duncan, 1972; Miles and Snow, 1978; Hambrick, 1982). Among the most significant elements that were theorized to exist in the external environment were customers, competitors, government regulations and labor unions. While the individual components that made up each researcher’s conception of the environment were not always the same, each conception agreed that the various environmental elements acted to create uncertainty for firms.

Conceptualizations Of Organizational Environmental Uncertainty

Chester Barnard (1938) was one of the first management scholars to explore the relationship between firms and their external environment. In his work, The Functions of the Executive, Barnard examined the impact that environmental uncertainty had on organizational strategies. Barnard believed that the physical environment was inherently unstable and that this instability created strategic uncertainty for firms. He argued that the primary reason for this uncertainty was the inability of managers to comprehend all the information present in a given environmental situation. Barnard felt that “under most ordinary conditions, even with simple purposes, not many men can see what each is doing or the whole situation” (Barnard, 1938, p. 106). This lack of perfect information about the environment posed significant problems for both firms and managers as it created ambiguity during the strategic decision making process.
Barnard believed that organizations should survey the opportunities and threats present in the external environment before deciding whether to operate in that environment. He argued that interacting or not interacting “with a particular environment centers on the identification of the key strategic factor and the ability of the organization to provide the missing factor, or to be able to effectively match the current capacities of the organization with the key strategic factor in such a way as to create an advantageous opportunity for the organization” (McMahon and Carr, 1999, p. 233).
Simon (1957), March and Simon (1958), and Cyert and March (1963) expanded on the work of Barnard contending that managers were forced to make decisions under conditions of “bounded rationality.” Bounded rationality concerns itself with organizational processes related to the “choice of courses of action in an environment which does not fully disclose the alternatives available or the consequences of those alternatives” (Thompson, 1967, p. 9). A logical result of bounded rationality is that managers and firms are not able to fully understand complex environments, and are forced to make decisions while possessing incomplete information about their strategic options.

Information uncertainty perspective
In the 1960s, authors further elaborated on the information uncertainty perspective developed by Barnard. Lawrence and Lorsch (1967) and Duncan (1972) both argued that imperfect knowledge about the environment created uncertainty for firms. It was also posited that managers would perceive the environment in ways that were consistent with their training and personal characteristics. As such, managerial perceptions played a significant role in determining the amount of uncertainty managers perceived in the environment.
Within the information uncertainty school of thought, Lawrence and Lorsch (1967) defined three components of environmental uncertainty. The first component, based on the work of Barnard, was the lack of clear information available about the external environment. The second component was the long time span required for feedback after strategic action. Even after a firm had formulated and implemented a strategy, it still might not be sure if it had achieved a fit with its external environment. The final component was the general uncertainty inherent in causal relationships. It was very difficult for firms to accurately predict the effects that specific strategic actions would have on the external environment, and also what effect environmental changes would have on the firm.
Duncan (1972) argued “uncertainty and the degree of complexity and dynamics of the environment should not be considered as constant features in any organization. Rather, they are dependent on the perceptions of organization members and thus can vary in their incidence to the extent that individuals differ in their perceptions” (Duncan, 1972, p. 325). He believed that the overall amount of uncertainty present in the environment was determined by managerial perceptions of that environment.
Managerial perceptions of environmental uncertainty can also be influenced by the importance managers assign to certain environmental variables. As Hitt et al. (1982) explained, “the recognizable pattern of organizational responses to environmental conditions is determined not so much by the objective characteristics of the organization-environment interactions as by managerial perceptions of the strategic importance of the critical areas contained within different organizational functions” (Hitt et al., 1982, p. 270). Thus, organizations will respond to environmental factors that they judge as having a high degree of importance to firm survival.
The common theme unifying the works of Barnard (1938), Lawrence and Lorsch (1967), and Duncan (1972) was the belief that it was impossible for a firm to acquire perfect knowledge about its environment and this lack of information created uncertainty for the firm. The threats and opportunities that managers perceived to exist in the external environment ultimately determined a firm’s choice of strategic actions and influenced a firm’s evaluation of its strategic options. As perceptions can directly influence the firm’s actions, researchers in the information uncertainty school were not especially concerned with the objective environment (Sharfman and Dean, 1991).
Consistent with their argument that managerial perceptions ultimately shape strategy formation, researchers in the information uncertainty school have typically employed perceptual measures of uncertainty (Duncan, 1972; Miles and Snow, 1978; Tung, 1979; Hrebiniak and Snow, 1980; Milliken, 1987; Daft et al., 1988; Sawyerr, 1993; Buchko, 1994; Dickson and Weaver, 1997). These researchers “objected to the use of objective measures of environmental uncertainty. They argue[d] that firms respond to the environment perceived and interpreted by the decision makers and that the environmental conditions that are not noticed do not affect management’s decisions nor actions” (Sawyerr, 1993, p. 290).

Related Articles
  Organizational Environmental Uncertainties
  Resource Dependence Theory In Management
  Environmental Dimensions In Measuring Uncertainties
  Environmental Protection Agency FAQs
  Overview of ISO 14001 EMS Standard

Article Tags:



Related Forum Posts
HRPreneur - Hi everyone, I am new to the forum and I recently started my own Human Capital (HR) consulting firm called HRPreneur Inc. HRP focuses on making human capital a strategic differentiator for SME's. Below is a summary about HRP; Who We Are: HRP is a Human Capital consulting firm with 30 years of experience that becomes an extension of your company by providing a full array of services to help you create a highly engaged workforce focused on achieving strategic results in order to build a long lasting great company! Mission: HRP provides small and medium sized businesses a Strategic HR Business Partner to increase employee engagement, resulting in cost savings, increased productivity and results at an affordable rate! Vision: To inspire and warrant SME's reach their full competency! Cost Effectiveness: We provide over 30 years of experience at a fraction of the cost at a strategic executive HR business level You will save between 50% to 60% in costs per year on salary, bonus, benefits, training, office space alone We will provide you additional cost efficiencies through our services Services: • Strategic Human Resources Planning • Organizational Redesign • Change Management • Organizational Culture Development • Employee Engagement Programs • Leadership Assessment and Development • Compensation Design • Talent Acquisition • Assimilation and On-Boarding • Performance Management • Talent Management & Succession Planning • Human Resources Due Diligence • Human Resources Audit • Full Service HR Outsourcing


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

10 Reasons Your SBA Loan May Be Declined

Five Ways to Show Honest Appreciation

B2B PR – Planning for Success

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.