The Impact of Volatile Environments
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Published: Wed, 14 Jun 2017
The organization exists in order to achieve a goal. To reach this purpose, it has to evolve in an environment with which it interacts. This environment implies all external elements that have the potential to affect the organization. Some elements have direct impact on the organization while others do not. Today, the environment is changing so fast that it becomes increasingly volatile. In fact, it creates uncertainty. Thus, some opinions state that this changing environment represents great threats for the organization. However, other opinions see the volatile environment as an opportunity for the organization to innovate. Based on these considerations, this paper analyzes the different sectors of the external environment, highlights the way they influence the organization and demonstrates how they make up threats or opportunities for this latter.
Part 1. – The environment
The external environment of the organization is made up of several sectors. Scholars state that: “for each organization, ten sectors can be analyzed”, (Richard L. Daft, 2010). These sectors can be all the outside institutions or forces that have impact to organization’s ability to reach its goal. Organization has to interact with the market sector, the industry, the government and the financial institutions. It also has to cope with economic conditions. Organization needs to get human resources, and adequate technology. All of these components imply the external environment.
This external environment is not static. The elements with which organization works are quite dynamic. They change all the time. Most of the times, it is very hard for organization to even predict the change rates. Now, what are the characteristics of these elements? How volatile are they today?
Nowadays, customers are becoming increasingly advised. Day by day, they are arming with extensive information and being more resistant to stimuli. The clients want goods and services customized to their needs and their interest for a particular product can be abruptly shifted. Moreover in the context of the globalization, markets and technologies are more and more interconnected. Then, it is not easy to handle all the variables that motivate the choice of the customers.
It describes a particular business activity (for example, the software industry). This sector has a life cycle. This cycle shows an image of the changes observed in the industry over time. The life cycle is not static. It has several stages: birth stage, growth stage, shakeout stage, maturity stage and decline stage (see exhibit 1).
Birth Growth Shakeout Maturity Decline
During the first stage, organizations seek to develop new services or goods. Then, the services or the goods gain customers acceptance and begin to grow rapidly. This is the second stage. The third stage is the most fragile. When the growth becomes visible, many organizations will enter the industry. Thus, the environment can be more agitated. During the fourth stages, the sector becomes more stable. Finally, during the last stage, the activities are quite slow.
Mostly, the life cycle changes very fast. When competitors, through advertising and new services or products, react with aggressiveness; instability occurs.
In the government sector, several aspects can be analyzed. The political aspect makes up an important force. In many countries, changes in political arena can cause high uncertainty in the environment. In reality, these changes are not the main problems; in themselves. The issue is the way in which they occur and the outcomes they produce. In most countries, there are changes in the political arena but the environment still stays more or less stable. The other aspects in the government sector are taxes, laws and regulations. In many government designs, they are all intertwined.
Change is inherent to the government sector. The issue is when it occurs abruptly. For example, when a rupture suddenly happens in the political arena, it may create chaining effects on the whole environment and make it very unstable.
The Financial and Economic conditions
Every single manager knows that the world economy is intertwined. An economic crisis in a country can affect the economy in other countries. A recent example may be the recession in the United States. Many countries in the world have been hit by the effects of this crisis. “The impact of the crisis on the world economies would have been even worse without the drastic measures taken by governments and central banks” (David Rhodes and Daniel Stelter,2010). Another example is the European crisis. A financial disequilibrium in few European countries causes great turbulences in the zone. Then it is clear that the influence of the intertwined economy cannot be neglected.
During this decade, the world has known several financial and economic crises. The stakeholders have made a lot of efforts to boost the global economy. But, much remain to be done. According to the “Global Financial Stability Report (IMF – October 2010), despite the ongoing economic recovery, the global financial system remains in a period of significant uncertainty”. The banking system still faces up complex situations. In mature credit markets worldwide, the total losses are very important. To keep themselves alive, the banks have to get additional capital. Thus, these crises make the environment risky.
Many other variables such: Stock market, unemployment rate and inflation have to be taken in considerations. These variables broadly depend on the financial and economic conditions.
The human resources
In the global economy, highly qualified human resources make up a potential source of comparative advantage. They play a great role in the economy. The human resources represent valuable assets in the business environment. Today, scholars even talk about “human capital”. The idea is not to consider the human being as a machine which only provides services to organization. The approach is to have a better understanding on how the human skills can be an important booster for the economy of the 21st century.
This sector broadly depends on universities outcomes. Nowadays, the world is changing so rapidly that the universities should do more efforts to produce high developed human resources. That is to say, these competencies have to fit to the reality of the changing world. Most of the times, the shifts are very fast. In this case, the universities usually take more times to respond. It does not mean that they are ineffective. The problem is that the universities, themselves, have to cope with many complex variables.
There are a lot of challenges in the human resources sector. While these resources become scare, the law of demand, in the labor market, will be applicable.
The technology is becoming essential for the well-being of the global economy. The technology affects the way information is treated, the way enterprises produce and the way people communicate. Since the world has become a small village, the information technology makes up a mainstay in business sector. The evolution of the internet makes the exchanges easier among people. Nowadays, it is possible to buy anything from anywhere. People do not need to travel for some meetings anymore. Web-conference allows us to communicate with high definition video and high quality sound. Finally, every single person knows that the technology plays a great role in the world.
However, the evolution of the technology is so fast that it is becoming difficult to handle it. The changes are often done abruptly. Mostly, we do not even have time to react. The technology we use today will be rapidly obsolete tomorrow. Moreover, the technology creates a virtual world that sometimes contains a lot of security issues. We can conclude that technology is useful but this sector makes up a high speed rail which often stuns managers.
Nowadays, there is evidence that the external environment is not quite stable. The markets become more agitated; the industry’s stages run faster; taxes, laws and regulations cannot be handled by the organization, the financial and economic conditions make up uncertainty, the human resources are scarce; and the technology is advancing at an incredible pace.
These considerations are far from being alarmist analyses. They only describe the atmosphere in which today’s organizations evolve. Now, how does such volatile environment influence the process of the organization?
Part 2. – The influence of volatile environment on the Organization
Considering that the organization is not an isolated entity, it is important to understand how it interacts with the environment into which it evolves. To have a better understanding of this interaction or the way the external elements, described in the first part, threaten the organization, it is essential to know about the field of activity and the model of management adopted by the organization.
Generally, organization can adopt traditional management or modern management. An environment that has a high changes rates makes up a great threat for both models. If we understand how threatening a volatile environment can be for each model of management, we can deduct how it is for the organization. Because this latter is like it is shaped by the model.
In the traditional management theory, the organization elaborates proprietary knowledge. It uses this knowledge to extract advantages. Since this information is essential for its growth, the organization protects this knowledge and tries to make sure that it is not accessible by any other entities. “To communicate with the external environment organization has to use official channels” (Stephen Denning). In a few words, we can say that the organization puts more emphasis on its internal activities.
Despite this strategy, it is clear that the influence of the volatile environment still affects the organization. Thus, let us analyze more deeply how some external elements threaten the traditional model of management.
As we have mentioned it above, in the first part of the paper, the customers gain more power than ever in the market. This compels the organization to share information and to response in a short time. Meanwhile, the way which the traditional management shapes the organization does not allow this latter to be as flexible as possible. Then, it becomes harder for the organization to catch the expectations of the customers. When we pay more attention to internal activities than the customers, they go elsewhere.
In an industry where the competition is aggressive, it is very painful for a traditional management to hold on. It becomes difficult for an organization which adopts this model to compete in a context of globalization. Today, a new approach of competition is born. To be competitive in an environment where the resources are scarce, the organization has to develop relationships with other organizations. That does not mean the organizations with traditional management do not have relationships to other organizations. The point is that they are not opened enough to get or share potential resources that allow them to compete aggressively. This model shapes the organization as an autonomous entity. It is clear that no organization can evolve in quarantine; today. That is to say, the organization has to have an opened approach to survive. Thus, we can say that an agitated industry may deadly affect the traditional model of management.
Meanwhile, it is important to mention that the absence of openness and resources sharing is not the only cause that makes the traditional organization fails in an aggressively competitive arena. The way that the traditional management organizes its processes should be taken into considerations. If the manager does not implement a dynamic structure that empowers most of the lower levels of the hierarchy, the organization will never be able to react rapidly against the destructive arrows that come from the competitors of the industry.
The progress of the technology also makes up one of the threatening elements that affect the organization adopting a traditional management. Nowadays, to survive in a global environment, organizations have to open themselves to the technology. Because “Markets, technologies and organizations are becoming increasingly interconnected”, (Richard L. Daft). Moreover the digital workplace created by the advanced technology is a big challenge for the traditional model.
We know that the traditional organization is shaped vertically. According the hierarchy, the key information stays in the top-level. The employees who are in the lower level do not need to have information. They have only to execute without, sometimes, understanding. Nowadays, the information technology provides web 2.0 that stuns everyone. It is a powerful platform where employee can easily get information. That is to say information is not a secret anymore. Thus, web 2.0 makes up a kind of horizontal structure. It can enable employees to be more independent and promote collaboration. Then it is not good for the vertical structure.
Now we understand how fast changes in the external environment can challenge the traditional management, it is important to see the degree of influence of these perturbations on an organization which adopts the modern approach of management.
Today, many organizations adopt a new model of management. Organizations have a new approach for identifying, collecting and storing intellectual capital; in some words, a new way of working in order to achieve their goal. Differently from the traditional model, the organization is designed with more flexibility. Managers develop new strategies for collaborating with other organizations in terms of resources sharing and knowledge transfer. The organization structure is shaped to provide horizontal information linkage. “This linkage organizes employees around core processes rather than by function, product and geography”, (Richard L. Daft).
In the last section, we have mentioned that the lack of flexibility and openness of organizations is one of the problems that prevent them to normally compete in an industry where the changes rates are uncontrollable. According to the previous paragraph, the modern management seems to resolve this problem. Now, how can the volatile environment affect the organizations which adopt the modern management?
While the lack of openness of traditional organizations makes up a disadvantage for them to compete in the global market, the broad openness of modern organization exposes them to many threats of the external environment. The problem is not the openness, but the degree at which organization is opened. Let us see what may happen to the technology sector.
In the first section, we have mentioned the progresses go so fast that some technologies we use today become quickly obsolete tomorrow. An organization that totally rests on the technology can be deadly affected by an abrupt change in this sector. Imagine an organization that invests a fortune in a technology and then, after a very few years, this latter becomes obsolete.
An obsolete technology causes an issue other than the financial loss. This is the problem of security risk. It is clear that, with the information technology, the organization is opened to the entire world. Using an obsolete technology can increase the risk of being attacked by hackers. Many reasons explain this. One hand, mostly, the firms that provide technological facilities abruptly change their product or services because of security breaches. Mostly, they rather develop new product than correct the existing breaches. Because they are also stun by the evolution of the technology. Secondly, the spywares evolve as well as the information technology. If the information system of the organization does not evolve, they will catch it. In fact, continuing to use such technology may affect the organization. Some key information of the organization may be accessible by non-authorized persons who will use them against this latter.
Both the modern and the traditional model of management are susceptible to be threatened by a volatile environment. There is not a perfect model. Each of them is affected in a different way. The uncertainty of financial and economic sectors prevents them to achieve their goal. Many of them have already shut down. In addition to these perturbations, the human capital is becoming a scare resource. The challenges are big today, and they continue to be bigger. The few people who have high certified skills do not want to do long career in one organization anymore. This is a kind of instability in this sector. Moreover, the reforms which are done by the governments sometimes make up a great influence on the organization. Most of these reforms are qualified as protectionism and able to weaken the organization in its capacity to produce. Finally, the external environment imposes its law on the organization whether modern or traditional.
Part 3. – How does the volatile environment make up opportunities for the organization?
Organizations which are coping with the volatile environment know a secret. This secret is the Innovation. “We have to change to survive”, (Bob Jordon). The organizations have to innovate or they perish. The real danger is not in the environment. It is in the way which the organization reacts. Google has bought YouTube to cope with its giant competitors. Buying YouTube enabled it to grow in functionalities; then to react. Oracle has bought Sun to empower itself in the face of IBM. These initiatives fit into an approach of innovation.
A volatile environment gives the opportunity to the organization to change its structure and strategy. Many organizations adopt a dual-core approach by implementing a technical core and a management core. For the traditional organizations, it is possible to implement temporary systems which allow the organization to response quickly to the threats.
In addition to these considerations, the globalization and the progresses in the information technology make up a great opportunity for the organization to spread itself. An organization that wisely uses the technology can be more efficient and effective. Many tools are available to measure the performance of the organization. The tools allow managers to analyze the data manipulated by the organization. Then, they are more comfortable in decision making.
It is evident that the volatile environment threatens the organization. It is not easy to handle the variables of the external elements. Meanwhile, there are a lot of opportunities to get. Many organizations have taken advantage of the external environment to innovate their structure and their products. Considering these facts, we can deduct “what does not kill us makes us stronger”; but we should be smart enough in taking opportunities.
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