Chapter 2

The Organisation Business Environment

Business does not operate in vacuum. It operates in the ambit of environment.

Organisation environment has been described as the aggregate of tangible and intan-
gible factors that impact on the decision-making behaviours of individuals in the
organisations (Duncan, 1972; Fahey & Narayanan, 1986; Frishammar, 2006;
Rosenzweig & Singh, 1991).
“These [organisations] systems change and reorganize their component parts to adapt them-
selves to the problems posed by their surroundings. This is the main reason the systems are
difficult to understand and control. They constitute a ‘moving target’ ”. [Holland, 1992:18,
emphasis added]

Holland’s assertion suggests that a firm’s business environment is a ‘landmine’

of triggers of firm adaptations. Customers, competitors, firm’s employees and other
material resources, distributors, suppliers, shareholders and other stakeholders are
common examples of a typical firm’s environment.
In this chapter, the multidimensionality and multilevel nature of business environ-
ments are examined. This nature of business environments is one of the key reasons
why it is difficult to achieve adaptation. Paradoxically, this chapter also highlights
business environments as the triggers of organisational adaptations. These triggers
must be understood and captured in context before firm can create and appropriate
values for themselves and their stakeholders. The chapter also emphasises the need
for organisations to take cognisance of dynamic and complex features that permeate
in all environmental levels, and this has implications on their businesses.

2.1  The Dimensions of Business Environment

Some management scholars have described organisation environments as placid or

turbulent (Emery & Trist, 1965), stable/uncertain (Lawrence & Lorsch, 1967) and
simple-complex or static-dynamic (Duncan, 1972). Equally, business environments

© The Author(s) 2018 11

O.E. Adegbite et al., Organisational Adaptations, SpringerBriefs in Business,
DOI 10.1007/978-3-319-63510-1_2
12 2  The Organisation Business Environment

have been discussed under various conceptualisations with a view to describe spe-
cific sectors of organisational environments. This includes the task environment
(Dill, 1958), domain (Levine & White, 1961), sub-environment (Lawrence &
Lorsch, 1967), territory (Child, 1972) and industry (Porter, 1980). Generally, a typi-
cal business environment is characterised of uncertainty, complexity and munifi-
cence (Aragón-Correa & Sharma, 2003; Dess & Beard, 1984). These are examined
in detail below.

2.2  Environmental Uncertainty

Scholars in management studies view uncertainty sometimes as “decision situa-

tions where there is an unknowable future and sometimes to situations where this
future is knowable, but not calculable” (Liesch, Welch, & Buckley, 2011a,
2011b:854). It can also be described as ‘an individual’s perceived inability to pre-
dict business environment accurately’ because of ‘[in] sufficient information or the
failure to discriminate between germane data and irrelevant data’ (Milliken,
1987:136, emphasis added). Central to the theory of transaction cost economics
(TCE) is uncertainty (Williamson, 1985). It is often triggered by ambiguous situa-
tions and sketchiness which accentuates the bounded rationality (limited by the
available information, constraints of cognitive minds and the time frame to make
the decision) of humans to gather and explore all possible eventualities to a deci-
sion (Liesch et al., 2011a, 2011b). Furthermore, there are uncertainties influencing
decisions that inhibit knowing; such that the decision eventualities are absolutely
imperceptible. It is also referred to as environmental dynamism which typifies
unpredictability of environmental change (Bendapudi & Berry, 1997). In such
unpredictable instances, drawing inferences from general context to a particular
situation is problematic in that “the past does not provide a guide to the course of
future events, (and where) agents are truly uncertain as there currently does not
exist information that will help them discover the future. Decision have to be made
and choice is genuine” (Dunn, 2000:427). This description of uncertainty explains
in part the nature of contemporary business environment. It also affirms decadal
assertion about uncertainty (Knight, 1921; Slater & Spencer, 2000) and faults the
postulation of deterministic nature of uncertainty (Williamson, 1985). Three types
of business environmental uncertainties are identified (Aragón-Correa & Sharma,
2003). They are:
1. Environmental state uncertainty occurs when managers identify trends in their
environments or some of the components (of their environments) to be unpre-
dictable (Aragón-Correa & Sharma, 2003; Milliken, 1987, 1990). It is about
dearth of understanding about ways in which elements of the environment might
be changing (Ashill & Jobber, 2010).
2.2  Environmental Uncertainty 13

2. Organisational effect uncertainty happens when managers experience difficulties

in comprehending or predicting the influence of changes in their organisations’
general business environment (Aragón-Correa & Sharma, 2003).
3. Decision response uncertainty happens when managers perceive risk in foresee-
ing the outcomes of idiosyncratic decisions (Aragón-Correa & Sharma, 2003;
Milliken, 1987).
The inherent attribute of these uncertainty typologies is different, and failure to
recognise them has resulted in many conflicting research findings (Ashill & Jobber,
2010; Doty, Bhattacharya, Wheatley, & Sutcliffe, 2006).
Researchers in business environmental studies argued that managers experienc-
ing uncertain business environments are likely to be more proactive and adopt more
innovative approaches than their peers in less turbulent environments (Miles &
Snow, 1978; Milliken, 1987). This is so because they tend to anticipate happenings
and devise precautionary actions rather than reacting to incidents that have already
happened (Aragón-Correa & Sharma, 2003). In essence, such managers operate in
proactive organisations in which decision-making is more probably decentralised at
the interface between business and the task environment. The decentralisation of
decision-making permits line managers to use their discretions in predicting future
strategic trends (Sharma, 2000) and avail them the opportunity to develop their
capabilities (Aragón-Correa & Sharma, 2003). Proactive firms are ‘prospectors’ in
their characteristics and objectives (Miles & Snow, 1978); they invest more into the
development of novel products and models with marginal negative effects on the
task environment (Aragón-Correa, 1998; Buchko, 1994); managers in proactive
organisations exhibit discretion and take risks (Sharma, 2000). It is argued that
uncertainty and risk coevolve with one another but should not be construed to be the
same (Liesch et al., 2011a, 2011b). Both are unique constructs with distinct effects,
individually and jointly on managerial decision-making process (Alessandri et al.,
2004). Unlike uncertainty, risk relates to decisions where the outcomes of actions
are contingent on identified probability distributions (Liesch et al., 2011a, 2011b).
In the international business literature, the implications of uncertainty and risks to
multinational firms in international business environments have been identified
(Austrade, 2002; Buckley & Carter, 2004). For example, the importance of uncer-
tainty and risk in decision-making at various levels of international activities has been
suggested, particularly as multinational firms involve in new activities such as enter-
ing new markets, employing various modes of operations or changing international
strategies (Liesch et  al., 2011a, 2011b). Uncertainty lessens the ability of firms to
create value by constraining the scale and effectiveness of the activities they undertake
(Buckley & Carter, 2004). In determining modes of foreign operations firms might opt
for low commitment (e.g. franchising/licensing) compare to high commitment (e.g.
foreign direct investment); this implies that risk and uncertainty influence the nature
and content of action taken by firms (Liesch et al., 2011a, 2011b). In order to mini-
mise uncertainty and risk, firms embark on market ­spreading plan, wide-ranging mar-
ket research and solicit government support (Cyert & March, 1963).
14 2  The Organisation Business Environment

2.3  Environmental Complexity

This is one key component of general business environment (Aragón-Correa &

Sharma, 2003). Complexity in business environment is characterised by multiple
and diverse elements and situations in such environment (Buchko, 1994; Milliken,
1987). In today’s business environment, complexity is the most common and preva-
lent challenge confronting organisations. The task of managing complexity should
be viewed as a core competency issue for managers (Maznevski, Steger, & Amann,
2007). While there is agreement in management literature on the existence of envi-
ronmental complexity, differences occur in classifications of this conundrum.
Management scholars used different criteria to classify organisational complexity.
This ranges from within and outside organisation-based classification, source-based
classification, influence-on-firm performance-based classification, firm-individual-­
based classification and internal and external complexity. Irrespective of the basis of
classification, it is adduced that complexity originates from human activities
(Aragón-Correa & Sharma, 2003; Birkinshaw & Heywood, 2010; Vasconcelos &
Ramirez, 2011). Also in the face of external complexity, organisations often respond
by spiralling up their internal complexity, through organisational structure, func-
tion, operation and/or circumstance (Vasconcelos & Ramirez, 2011). Hence, people
are both the source and victims of business complexity and solution lays in manag-
ing (humans) behavioural causes of complexity (Collinson & Jay, 2012). In their
study involving a survey of over 500 managers in Europe, involving over 300 com-
panies comprising of 10,000 employees, among them, Collinson and Jay (2012)
reported that nearly 66 % of managers reported over 5% of productivity loss in their
businesses was due to complexity, and 10% of managers estimated that as high as
30 % of recorded productivity loss was due to complexity in business environment.
It has been argued that those organisations that can effectively manage the complex-
ity enigma are likely to develop competitive advantages (Aragón-Correa & Sharma,
2003; Collinson & Jay, 2012).
As enumerated above, various types of complexities have been identified in
organisational studies. These are typically based on their origin/perceived influence
on firm performance (Birkinshaw & Heywood, 2010;Collinson & Jay, 2012 ;
Vasconcelos & Ramirez, 2011). Some of the identified complexities are:
1. Diversity;
2. Interdependence;
3. Ambiguity and;
4. Flux complexities (Maznevski et al., 2007).
Furthermore, some certain firm characteristics have been identified to contribute
to complexity. These include firm size, usually, the larger an organisation, the more
complex it becomes. Also, firm factors of interests are levels of hierarchy within the
firm, structural divisions/organisational structures, control mechanisms, territorial
diversity in which firm operates, rate of change of firm/individual behaviour, proce-
dures, intra- and inter-business unit relationships and adopted communication
modes (Collinson & Jay, 2012; Vasconcelos & Ramirez, 2011).
2.3  Environmental Complexity 15

For clarity and simplicity in this study, we adopt Maznevski et al.’s (2007) clas-
sification of environmental complexity. Similarly diversity, interdependence,
ambiguity and flux permeate, and other suggested classifications of complexity.
For example, diversity refers to complex challenges both within (endogenous) and
outside (exogenous) the organisation. Endogenous complexity relates to diverse
business models for different strategic business units, diversity in the human
resources pool, variations in the means and ends spanning from simple financial
objectives to a broad (including non-profit) corporate responsibilities. Exogenous
organisational diversity relates to mammoth of stakeholders with various interests
and influence on the organisation (this includes customers, shareholders, regula-
tors, trade associations, suppliers, distributors, etc.), diverse customers’ needs and
different cultural values. Others include varied influence from economic, political
and legal environments and various counter strategic alternatives from the com-
petitors. It is no understatement that today most large organisations increasingly
face various types of complex diversity. Managing the plethora of diversity is not a
small task. Equally, attempts to reduce diversity usually result in less responsive-
ness (Maznevski et al., 2007).
Global interdependence of firms is a resultant effect of globalisation. In today’s
business environment, value webs (i.e. business transactions through the internet
links among firms) are fast-replacing conventional value chains (Liesch et  al.,
2011a, 2011b; Maznevski et al., 2007). Increase in product complexity and increase
in sales figure can result in increased interdependence of firms. This was the case of
automobile giant Toyota. Between 2002 and 2008, Toyota’s manufacturing facilities
outside Japan increased markedly from 37 to 53, with annual average global sales
of 9% (Cole, 2011). Toyota car crisis of 2009/2010 was partly traced to significant
hiring of new employees, partnering with non-Japanese suppliers who are unfamil-
iar with the culture of Toyota’s quality and massive hiring of contracts engineers in
Toyota’s various car plants across the world (Cole, 2011). Toyota’s complexity
inherent in its interdependence of firms impacted negatively on the firm’s reputa-
tion/brand, financials (profitability) and reverse trends (i.e. recall of products and
cancellations of ordered goods). As globalisation comes with huge business/market
opportunities, it has associated challenges in business complexity (Liesch et  al.,
2011a, 2011b).
Ambiguity refers to enormous information in contemporary business environ-
ment with reduced clarity on means of interpreting and applying it to firm’s
advantage(s) (Maznevski et  al., 2007). Market dynamisms, surveys/reports and
other relevant market findings are becoming less reliable because of increasing mar-
ket uncertainties. Amidst the growing market uncertainties, many firms are strug-
gling to grasp their value drivers devoid of market ambiguities.
According to Maznevski et al. (2007), to many firms, the clarity between cause-­
and-­effect relationships is distorted by complex ambiguity. Associated difficulty
with ambiguity is the possibility of multiple interpretations of the same set of infor-
mation, based on the organisational knowledge, perspective or cultural inclinations
(Collinson & Jay, 2012).
16 2  The Organisation Business Environment

Flux or change refers to changeability element in the business environment to the

extent that today’s valid response to present challenge may be ineffective to tomor-
row’s problem. The problem of flux reinforces the call on firms to develop (1)
dynamic capabilities and (2) organisational framework that is capable of adapting
firm resources to any market situation at any point in time (Grant, 1996; Zajac,
Kraatz, & Bresser, 2000). Firms need a model that is capable of adapting to any
market situation. It is about conceptualising strategy as a framework of practices
and principles that constitutes the firm’s DNA rather than a bureaucratic set-up. It is
recognised that some organisational core principles should be nonnegotiable.
Generally, it is widely shared and accepted that organisations that are characterised
by light rules and that operates using a developed learning model are able to adapt
quickly than their peers. In such organisations, competitiveness is embedded in its
swift of adaptability and scalable learning models (Maznevski et  al., 2007;
Vasconcelos & Ramirez, 2011).
Apart from being a critical component of business environment, the concept of
complexity has significant but relevant connotations in other discipline outside
management. This connotation is well commented in science-based disciplines like
biology, computer science and information systems. There exist similarities between
management discipline, and these identified disciplines because they both address
complex systems. Besides, contemporary business reality reveals that there is grow-
ing interdisciplinary research of important concept that cross across various disci-
plines of which the research in complex systems belong. More importantly,
organisations can be viewed as complex adaptive systems (CAS) as it is obtainable
in other disciplines. With this in mind, we consider the definition of complexity
from another discipline. Santa Fe Institute defines complexity as ‘systems with
many different parts which, by rather mysterious process of self-organisation,
become more ordered and more informed than systems which operate in approxi-
mate thermodynamic equilibrium with their surroundings’ (Cited in Peltoniemi &
Vuori, 2004:9). Organisations operating in closed systems are viewed as transacting
in a simple environment (Dess & Beard, 1984; Duncan, 1972). And this is similar to
Santa Fe Institute description of ‘systems which operate in approximate thermody-
namic equilibrium with their surroundings’ (Cited in Peltoniemi & Vuori, 2004:9).
Conversely, organisations operating in open system face heterogeneity in their sur-
roundings, they are most likely to face more complex environment with greater
uncertainty with greater data/information processing demands than those operating
in the close system (Dess & Beard, 1984; Pennings, 1975). The degree of openness
of a system is relatively a replica of its combinatorial power and so is its degree of
complexity (Boisot & Child, 1999).

2.4  Environmental Munificence

Munificence (or resource availability) is a critical component of business environ-

ment (Aragón-Correa & Sharma, 2003; Staw & Szwajkowski, 1975). It refers to the
scarcity or plenteous of key resources needed by (one or many) organisations
2.4  Environmental Munificence 17

operating within an environment (Dess & Beard, 1984; Tushman & Anderson,
1986). The survival and growth of organisations within an environment is influ-
enced by the resources available for sharing in that environment; the available
resources also affect the abilities of new firms to join this environment
(Castrogiovanni, 1991; Randolph & Dess, 1984).
Environmental munificence manifests in the form of (but not limited to) fast-­
growing markets, government interventions, [in] sufficient infrastructure, lower lev-
ies (taxes), competent workforce and national/global economic upturn (Decarolis &
Deeds, 1999; Primc & Čater, 2015).
Empirical findings in business environment literature reveal that competition
intensifies during period of scarcity of resources (Dess & Beard, 1984; Porter, 1980;
Yasai-Ardekani, 1989), with negative implications on profitability and organisational
slack (Beard & Dess, 1981; Castrogiovanni, 1991; Child, 1972; Singh, Tucker, &
House, 1986) and triggering adjustments in intra-firm attributes and behaviours of
members within the organisation (Castrogiovanni, 1991; Koberg, 1987). Also, firms
confronted with common resource scarcity may circumvent competition through
legal or illegal modes of collaboration and cooperation (Pfeffer & Salancik, 1978;
Staw & Szwajkowski, 1975). Whereas in situations where there are ample resources,
firms survive with ease and are able to pursue other goals (Castrogiovanni, 1991).
Environmental munificence is positively related to variety of strategies and
choices available to the firm (Brittain & Freeman, 1980; Tushman & Anderson,
1986). Empirical results support the view that firms operating with high munificent
environments have optimal strategic choices, experience harmonious organisational
constituencies and less competitive pressures (Castrogiovanni, 1991). According to
Castrogiovanni (1991), problems of over-abstraction and conceptual ambiguity have
been observed in environmental munificence-related studies. These problems arise
from the researchers’ options of the environmental munificence level(s) and dimen-
sions to investigate. Over-abstraction problem occurs when only markedly broad but
less specific levels are examined, while conceptual ambiguity relates to inconsisten-
cies in dimensions and definitions across studies in environmental munificence.
To overcome over-abstraction and conceptual ambiguity problems in business
environment research, Castrogiovanni (1991) suggested five environmental levels
and three kinds of munificence to ameliorate these problems. This is particularly
instructive because environments are both multilevel and multidimensional (cf.
Betton & Dess, 1985). Also, some environmental variables are more appropriate to
a particular firm and to the specific situations at hand than others (cf. Osborn &
Hunt, 1974). Both the five environmental levels and three kinds of munificence are
explained in the following sections.

2.4.1  Environmental Munificence Levels

The five levels of environmental munificence are the macro environment, the aggre-
gate environment, the task environment, the sub-environment and the resource pool
environment. The macro environment relates to general cultural context of a given
18 2  The Organisation Business Environment

geographic area. It encompasses variables identified to have critical influences on

organisational features and productiveness (Castrogiovanni, 1991). These variables
include economic, technological, demographic, social and political patterns and
trends (Osborn & Hunt, 1974). Relevant works in this area include influence of
long-term economic, social and political trends on the organisational forms that are
most dominant at various times in US history (Aldrich & Mueller, 1982).
The aggregate environment relates to relevant associations (such as trade asso-
ciations, trade unions), interest groups (such as relevant NGOs and other stakehold-
ers), constituencies (customer markets, competitors) and other categories of
individual and organisations that affect a focal bundle of firms (Osborn & Hunt,
1974). At this level, environmental definitions are slightly varied, for example,
organisational ecologist views this level as macro niche (McKinley, 1984; Ulrich,
1987) or ecological community (Astley, 1985; Carroll, 1984) in which a population
of firms operates. Prominent among economists is Porter’s (1980) work of external
forces influencing industry competition and profitability, where an industry repre-
sents a logical grouping of firms. Areas of research in this level include the aggre-
gate behaviour of actual, perceived, or a focal set of firms (Castrogiovanni, 1991).
Generally, aggregate environment is viewed as the summation of all task environ-
ments under which the set of firms under review is investigated.
According to Osborn and Hunt (1974), the task environment of any given firm
consists of all organisations with which it must relate with for survival and growth.
These include specific customers, investors, suppliers and other relevant partners
(Castrogiovanni, 1991). At this environmental level, research areas focus on actions,
decisions, outcomes and features of the entire organisations with a view of explain-
ing differences and similarities between individual organisations. For example,
organisational decision-making is more decentralised in dynamic compared to static
task environments (cf. Burns & Stalker, 1961).
Of all the five levels of environmental munificence, task environment has been
subjected to range of interpretations and usage (Castrogiovanni, 1991). Dill (1962)
argued that individuals and subunits within a firm have different task environments
in a firm that faces multi-task environments. This implies that Dill (1962) most prob-
ably considered task environment to be the same as sub-environments. Also, the task
environment Dess and Beard (1984) referred to tallies with Castrogiovanni’s (1991)
definition of aggregate environment. In any event, at the task environment level, sev-
eral sub-environments of a firm are viewed together (Castrogiovanni, 1991).
The sub-environment level concerns activities among set of individuals and
organisations that control resource pools which are most suitable to a firm subunit.
Actions and decisions taken by subunits’ managers are of most relevance under sub-­
environment. According to Lawrence and Lorsch (1967), each organisational sub-
unit concentrates on a different area of an organisation’s entire external environment.
For example, a techno-economic sub-environment is appropriate to the production/
manufacturing subunit; a market sub-environment is relevant to sales/marketing sub
unit; and a scientific sub-environment is relevant to the research and development
subunit (Castrogiovanni, 1991; Lawrence & Lorsch, 1967).
2.4  Environmental Munificence 19

The resource pool level, though the lowest of the five levels, is considered the
most specific level of the environmental munificent typology (Castrogiovanni,
1991). Research bordering on resource dependence is of most relevant at this envi-
ronmental level. For example, the criticality of several resources to particular organ-
isation and how challenging it was to obtain such resources is particularly vital
while evaluating how patterns of merger and diversification mirror interchanges of
critical organisational resources (Pfeffer, 1972; Pfeffer & Salancik, 1978).
Generaly, it can be adduced that dynamism and activities permeates all environ-
mental levels (Meeus & Oerlemans, 2000). Castrogiovanni (1991) argued that usu-
ally, there is an environmental level that is most relevant to a particular research
inquiry. For example, attention on specific decisions and actions about a particular
resource acquisition requires analysis of specific resource pools. Investigation into
differences and similarities across organisational subunits necessitates inquiry of
their applicable sub-environments. An insight into the differences and similarities
across organisational subunits is best explored by research in the task environment;
the general behaviour of a logical group of organisations may be most explicable by
exploring the aggregate environment. The overall inquiry into organisational trends
and patterns within geographical location requires examination of the macro envi-
ronmental situations of that area. Considering the foregoing, it is reasonable to say
that scholars should investigate environment at the level that is most relevant to a
specific research inquiry (cf. Castrogiovanni, 1991; Ford & Slocum, 1977).
However, it is useful to investigate boundary environmental levels to ensure a
comprehensive research outcome. This explains the call for multilevel environmen-
tal inquiries in empirical researches (cf. Betton & Dess, 1985). For example, while
research inquiry into a task environment reveals the differences in decentralisation
of decisions among organisations, to understand the whys and what decisions that
are decentralised, analyses of sub-environment and resource pool environments are
required (Castrogiovanni, 1991). Furthermore, research analysis at the task environ-
ment level may offer insight into the situations in which certain organisations are
most probably to defunct; probing of macro environment may provide the causal
issues influencing the aggregation of environments thereby revealing inherent rates
of defunct (Castrogiovanni, 1991; Harrigan, 1985).
Additionally, environmental factors at higher levels such as macro and aggregate
environments can exert transitive impacts on organisations through their influences
on lower levels (i.e. task environment; sub-environment and resource pool). For
example, decisions regarding employee recruitment and selection and training are
determined by the range of available manpower resource pool which in itself is
influenced by educational and demographics configurations at the macro environ-
mental level. Each higher level of environmental munificence is not just a combina-
tion of the levels; it is also characterised by synergies among the various
environmental variables acting in unison. Besides the transitive influences, higher
environmental levels can have immediate synergic influences on organisations
(Castrogiovanni, 1991).
20 2  The Organisation Business Environment

2.4.2  Environmental Munificence Types

Further to the five level environmental idiosyncrasies discussed above, three kinds
of munificence are identified in the management literature. They are:
1. Environmental capacity refers to the level of resource abundance within an envi-
ronmental context (Aldrich, 1979; Castrogiovanni, 1991).
2. Growth/decline relates to the relative change in environmental capacity

(Zammuto & Cameron, 1985).
3. Opportunity/threat refers to the degree to which environmental capacity is un-­
utilised (Astley, 1985).
It has been argued that if scholars in business environment can painstakingly
identify munificence type that is relevant to their works, the problem of conceptual
ambiguity will be markedly reduced (Castrogiovanni, 1991). Ibid, at each environ-
mental level, these three kinds of munificence are evident. It is suggested that
researchers need to clarify the kind(s) of munificence they are studying, and the
measures employed must be compatible not only with the kind of munificence but
also with the environmental level under inquiry. Effort short of this can lead to
inconsistent research findings with narrow measurement validity.
Additionally, researchers can analyse the environmental capacity, growth/decline
and opportunity/threat at multilevel environments, with more focus on to the sub-­
environment and resource pool levels as much as possible. This is because environ-
mental munificence analysis at the sub-environment and resource pool levels could
further understanding of how organisations acquire competitive advantage through
exchange and cross-utilisation of resources. Such effort will enhance testing of
more context-specific propositions, resulting in richer researcher findings and,
finally, more beneficial managerial recommendations. Further to the discussion of
business environment, four different perspectives are identified. They are the adap-
tive, the cognitive, the population-ecology and the resource dependence perspec-
tives (Frishammar, 2006).

2.4.2.1  The Adaptive Perspective

The adaptive perspective centres on investigating how the environment affects

organisations; the term ‘adaptive’ captures its underlying assumptions (Frishammar,
2006; Hannan & Freeman, 1977); specifically, the term ‘adaptive perspective’ was
borrowed from the work of Hannan and Freeman (1977); the main assumptions in
this perspective are that organisations are construed as active and can adapt to
changes in their environments by making decisions to modify strategies, structures,
and processes and then executing these decisions (Frishammar, 2006; Scott, 1998).
Successful managers are either able to guard their organisations against
2.4  Environmental Munificence 21

environmental influences or to design seamless adjustments with minimal disrup-

tion (Chakravarthy, 1982; Frishammar, 2006). This perspective is shared by many
management scholars (Ansoff, 1988; Chakravarthy, 1982; Fahey & Narayanan,
1986; Hofer & Schendel, 1978; Kotler & Armstrong, 1996; Miles & Snow, 1978;
Utterback & Abernathy, 1975). Much of the widely accepted hypotheses in contin-
gency theory fall under adaptive perspective (Galbraith, 1973; Hannan & Freeman,
1977; Lawrence & Lorsch, 1967); the underlying assumption guiding contingency
theory is that organisations with internal characteristics that best fit the dictates of
their environments will adapt optimally (Frishammar, 2006; Scott, 1998). This per-
spective is evident in the field of marketing, where organisations can realise their set
goals and record efficiency through adapting to the demands and dictates of target
markets (Kotler & Armstrong, 1996; Piercy, Cravens, & Morgan, 1997).
Adaptive perspective not only assumes that environment is analysable but that it
can be identified a priori and serves as an input in a strategy-construction process
(Frishammar, 2006). Organisations do not create or invent their environments, but
their environments may depict a fundamental order rather than a forced one (Fahey
& Narayanan, 1986).
This implies that through market research or environmental-scanning methods,
firms can investigate and identify its characteristics with the intention of achieving
successful adaptation (Frishammar, 2006). Identified key element of an organisa-
tion’s environment is the industry or industries in which it competes; this includes
buyers, substitutes, suppliers, competitors and potential entrants (Porter, 1980).
Organisation’s environment is not just the industry but may include the economic,
political, technological and social segments (Fahey & Narayanan, 1986). Of all the
four perspectives, adaptive perspective is considered the most appropriate in this
context, because it construes organisations as active and capable of adapting to
changes in their environments through modifications in firms’ strategies, structures,
and processes (Chakravarthy, 1982; Frishammar, 2006).

2.4.2.2  The Resource Dependence Perspective

The resource dependence perspective has a prime focus on the significance of

resources (Davis & Cobb, 2010). To survive, an organisation requires resources,
some of which are outside its control. Therefore, an organisation must interact with
others (usually other organisations) who control these resources. This reality makes
an organisation dependent on its environment. It reinforces the argument that organ-
isations have boundaries (Pfeffer & Salancik, 1978). The organisation ends, and the
environment commences at the point where the organisation’s control over activities
shrinks and the control exerted by other organisations or actors begin. This point
was succinctly articulated by Pfeffer and Salancik that:
The key to organisational survival is the ability to acquire and maintain resources. This
problem would be simplified if organisations were in complete control of all the compo-
nents necessary for their operation. However, no organisation is completely self-contained.
22 2  The Organisation Business Environment

Organisations are embedded in an environment comprised of other organisations. They

depend on those other organisations for the many resources they themselves require.
(Pfeffer & Salancik, 1978:2)

Going by Pfeffer and Salancik’s resource dependence perspective, organisations

are therefore externally controlled to some certain extent. This is so because when
organisation transacts with others for necessary resources; these others attain power
over the focal organisation. This fact makes an organisation dependent on its
environment.
According to Thompson (1967), an organisation is dependent on others in its
environment (1) in proportion to its need for resources or functions that element can
offer and (2) in inverse proportion to the ability of other elements to offer the same
resources or function. The level of control others have on a focal organisation is
evident in how dependent that organisation is on others for pursuing its goals. For
instance, handful but large interdependences usually imply that the degree of exter-
nal control is greater. However, an organisation can lessen its dependence on others
by avoiding single large interdependences. It may be better for organisations to
develop in a way that permits them to leverage on a variety of interdependences,
thereby being less dependent on an individual or a handful exchanges.
However, the challenge is not simply that organisations depend on others in the
environment but also that the environment is not dependable. Environments may
change, new organisations emerge and exit, and the supply of resources may
increase or dwindle, but a focal organisation can also change its activities in
response to environmental factors through adaptation. Thus, the emphasis of
inquiry is how the environment affects organisations. Additionally, the main
hypotheses underlying the resource dependence perspective are that organisations
are inhibited by their dependence on resources that others possess, which allows
others to exercise control over a specific focal organisation. But it is possible for an
organisation to adjust these dependences through a process of adaptation
(Frishammar, 2006).

2.4.2.3  The Cognitive Perspective

This school of thought held that organisations’ perceptions and interpretation of the
environment are vital. They also held that comprehending the environment in an
objective logic is practically impossible due to its complexity and the limited
information-­processing capabilities of organisations (Frishammar, 2006; Starbuck,
1976). Therefore, proponents of this perspective argue that the environment is un-­
analysable (Daft & Weick, 1984). This implies that organisations do not primarily
focus on lessening uncertainty through scanning and information-processing activi-
ties but rather focus on reducing ‘equivocality’. Where equivocality refers to unclear,
chaotic and ambiguous a situation where multiple meanings exist (Frishammar,
2006). Under such scenarios, new information may even increase uncertainty, as it
can be understood in diverse ways. According to Daft and Lengel (1986), managers
2.4  Environmental Munificence 23

generate or enact solution instead of learning from new data and information so as
to cope with situations of high equivocality. The cognitive perspective holds that
what people construe as their environment is generated by human activities and
attendant intellectual effort to make sense out of these activities (Smircich &
Stubbart, 1985). The core effort of inquiry is centred on how organisations and indi-
viduals actors attempt to comprehend their environment (Daft & Weick, 1984;
Frishammar, 2006; Starbuck, 1976).

2.4.2.4  The Population-Ecology Perspective

This perspective focuses on aggregates of organisations, tackling issues such as

market entry and exit and firm growth (Swaminathan, 1996). The central emphasis
of population-ecology perspective is the importance it places on selection. This
school of thought argues that considering that organisations are structurally inert
and slow to change, organisations’ ability to adapt is markedly constrained environ-
mental conditions select certain types of organisations for survival, while other
forms extinct (Hannan & Freeman, 1977), However, the idea of organisational
selection is not just a case of life or death; rather, it positively selects organisations
that are better fit vis-à-vis a particular environment than those that disappear. Aside
this, selection impacts are also seen in scenarios where issue of effectiveness rather
than survival is of concern.
The central theme of population-ecology perspective is focused on how the envi-
ronment influences organisations, chiefly through the mechanism of selection. As
with cognitive perspective, population-ecology perspective views environment as
un-analysable or at least close to un-analysable (Frishammar, 2006). Proponents of
this perspective argue that over time, organisations cannot correctly and constantly
comprehend disparities in unpredictable turbulent environments. This view is predi-
cated on the fact that organisations are often unable to rightly forecast future states
of the environment. Also, there is uncertainty that planned alterations will actualise
the preconceived change. This explains the evaluation that adaptation to the envi-
ronment is perceived as haphazard as far as the future is concerned.
Generally, organisation environment is broadly classified as internal and exter-
nal environments (Duncan, 1972). The internal environment of an organisation
comprises relevant physical and social factors within the confines of the organisa-
tion, while the external environment consists of all relevant physical and social
variables outside the boundaries of the organisation. Firm’s internal environment
consists of:
1. Organisational employee component—this includes (a) educational and techno-
logical background and skills, (b) past technological and managerial skills, (c)
interpersonal behaviour styles and (d) individual employee’s participation and
commitment to achieving organisational goals.
24 2  The Organisation Business Environment

2. Organisational functional and employees’ units component—this includes (a)

intra-unit conflict among firm functional and employees units, (b) interdepen-
dence of firm units in implementing their objectives, (c) technological features of
firm units and (d) inter-unit conflict among firm’s functional and employees unit
(Duncan, 1972; Frishammar, 2006).
3. Organisational domain component—this includes (a) firm goals and objectives,
(b) combinative process involving individual employee and groups into contrib-
uting optimally to achieving firm goals and objects and (c) nature of firm’s prod-
uct or service.
Firm’s external environment consists of:
1. Buyer/customer component including (a) main users of firm’s products or ser-
vices and (b) firm’s distributors of products or services
2. Supplier component including (a) equipment’s supplier, (b) product components
suppliers and (c) new material suppliers
3. Competitor component including (a) competitors for buyers/customers and (b)
competitors for suppliers
4. Socio-political component including (a) relationship with trade associations
with influence in the organisation, (b) government regulatory supervision in the
industry and (c) societal attitude towards industry and its particular products or
services
5. Technological component including (a) achieving new technological standards
of own industry and affiliated industries in the manufacturing of products or
services and (b) designing and improving new products through adoption of new
technological advancement in the industry (Duncan, 1972; Frishammar, 2006;
Komori, 2015)
Generally, the level of analysing organisational environment by many scholars is
that of the organisation context (Duncan, 1972; Rosenzweig & Singh, 1991). This
means that organisational environment analysis is conducted from the perspective
of a particular focal organisation (Frishammar, 2006; Miles & Snow, 1978; Piercy
et al., 1997).

2.5  D
 iscussion and Concluding Points on Business
Environments

Business environment is explained as being multidimensional, multilevel and multi-­

perspective concept. In this chapter, their implications on firm businesses were also
discussed. A pluralistic view of the environment offers a robust grasp of the condi-
tions in which business operates. The conditions are uncertain, complex and within
the confine of limited resources. Each environmental condition is both multilevel
and multidimensional in nature. Depending on nature of the firm and specific situa-
tion, some environmental variables are more appropriate than others.
2.5  Discussion and Concluding Points on Business Environments 25

Key Points for Practitioners

• Business environment is multidimensional typically uncertain, complex
and with limited resources.
• Environmental uncertainty lessens organisational ability to create value by
limiting the scale and effectiveness of the activities that can be deployed.
• Environmental uncertainty and risk coevolve but both are distinct con-
structs with different impacts, individually and jointly on managerial
decision-­making process.
• Risk relates to decisions where the outcomes of actions are contingent on
identified probability distributions.
• Business uncertainty relates to decisions about unknowable or undetermin-
able future. Manager’s perceived incapability in accurately determining
organisational business environment.
• Managers facing general uncertain business environments are likely to be
more proactive and adopt more innovative approaches than their peers in
less turbulent environments
• An organisational task business environment entails all organisations or
entities with which it must deal with for firm survival and growth.

Amidst the growing market uncertainties, many firms are struggling to compre-
hend their value drivers devoid of market ambiguities. The difficulties in compre-
hending value drivers might be connected to multidimensional nature of the firm
environment. Market surveys and other relevant market-assessing tools are becom-
ing unpopular in the face of increasing market uncertainties and complexities.
Environment complexity emanates from human activities. Those organisations that
are able to effectively manage the complexity conundrum are likely to develop some
competitive advantages.
Firms need a model that is capable of adapting to any market situation. Developing
such model may be challenging but insight into this could arise from understanding
the multidimensional, multilevel and multi-perspective nature of business environ-
ment and its implications on the firm context.

Recommendation for Future Research

• More research efforts that adopt multilevel environmental inquiries
approach in organisational adaptation research will be required to ensure a
comprehensive research outcome(s).
• Research into which dimension of business environment has the most sig-
nificant impact on organisational adaptation in a given context will further
our understanding of achieving desired adaptation.
• Research into the key features of organisational task environment/sub-­
environment/resource pool and how they are evolving will be of great
importance in understanding organisational adaptation.
26 2  The Organisation Business Environment

Usually there is an environmental level that is most applicable to a particular

research inquiry. Scholars should investigate environment at the level that is most
relevant to a specific research inquiry. Furthermore, researchers can analyse busi-
ness environment at multidimensional environmental levels, with more focus on the
sub-environment and resource pool. This is because environmental analysis at the
sub-environment and resource pool levels could help in comprehending how organ-
isations acquire competitive advantage through exchange and cross-utilisation of
resources. Such efforts will encourage analysis of more context-specific proposi-
tions, resulting in richer researcher findings and, finally, more advantageous to busi-
ness practitioners.

Summary of Key Points

• Business environment is characterised of three main environmental dimen-
sions, namely, environmental uncertainty, complexity and munificence.
• There are three types of business environmental uncertainties; these are
environmental state uncertainty, organisational effect uncertainty and deci-
sion response uncertainty.
• There are four identified environmental complexity types; these are diver-
sity, interdependence, ambiguity and flux.
• There are five environmental munificence levels; these are the macro envi-
ronment, the aggregate environment, the task environment, the sub-­
environment and the resource pool environment.
• Three kinds of munificence are identified in the management literature.
They are environmental capacity, growth/decline relates and opportunity/
threat; this refers to the degree to which environmental capacity is
un-utilised.
• In business environment literature, four different perspectives are identi-
fied. They are the adaptive, the cognitive, the population-ecology and the
resource dependence perspectives.

In adapting to environmental dynamics, core organisational philosophies should

be nonnegotiable. Organisations characterised by light rules that operates using a
developed learning model are able to quickly adapt to their environments compare
to their peers. In such organisations competitiveness is entrenched in its quickness
of adaptability and incremental learning archetypes. In studying adaptations in
organisation, firms must understand that dynamic and complex activities permeates
all environmental levels and is better examined holistically. Embedded in business
environments are triggers of organisational adaptations. These triggers must be
understood and captured in context before firm can create and appropriate values
from them.
http://www.springer.com/978-3-319-63509-5