Psychlopedia -- Key concepts -- Organizational concepts -- Environmental dynamism
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Managers and employees are often bombarded with inconsistent advice. Managers are sometimes told they should consider all possible sources of information before they reach decisions. In contrast, they might be informed they should trust their intuition to ensure they act swiftly. Similarly, some managers are informed they should present inspiring and charismatic speeches, whereas other managers are encouraged to motivate employees with specific goals and instructions.
The main source of these controversies, as well as many other contentious issues, is that some approaches might be applicable in a subset of contexts only. Environmental dynamism, which represents the extent to which the external environment is erratic rather than stable, affects the utility of these various approaches or orientations. To illustrate, when the environment is dynamic, charismatic leadership is especially effective (De Hoogh, Den Hartog, Koopman, Thierry, Van den Berg, Van der Weide, & Wilderom, 2004). Rational, considered decisions also become more important (Priem, Rasheed, & Kotulic, 1995), although export strategies should be primarily derived from intuition rather than customer feedback (Balabanis & Spyropoulou, 2007).
Definition of environmental dynamism
Environmental dynamism represents the rate of change in an environment. For example, Wijbenga and van Witteloostuijn (2007) defined environmental dynamism as the rate at which the preferences of consumers and the products of organizations change over time. Dynamic environments, by definition, are also unpredictable, devoid of patterns and regularities (Dess & Beard, 1984).
Implications of environmental dynamism
Decision making and exploration
Priem, Rasheed, and Kotulic (1995) maintained that rational decision making does not always enhance firm performance. Specifically, when the environment is stable rather than dynamic, rational decision making is unrelated to firm performance. When the environment is dynamic, however, rational decision making is positively related to firm performance.
Before this study, whether or not rational decision making is optimal in dynamic environments has been a major source of controversy. According to Fredrickson and Iaquinto (1989; Fredrickson, 1984; Fredrickson & Mitchell, 1984), organizations prefer predictable environments, in which rational decisions can be reached. That is, organizations like to identify, measure, and predict key variables as well as understand the causal relationships among these factors. In these environments, managers can consider as well as integrate a comprehensive range of alternatives.
In dynamic environments, however, these preferences to identify, measure, and predict key variables or to understand relationships among factors cannot be fulfilled. Rational decisions, defined as a comprehensive analysis of information as well as the formulation of enduring plans, also consume valuable time. Only incremental changes rather than comprehensive analyses are appropriate in these environments. According to this perspective, rational decision making approaches are most applicable in stable, rather than dynamic, environments. Consistent with this perspective, studies reveal that comprehensive plans are positively related to performance in stable environments (Fredrickson, 1984), but inversely related to performance in dynamic environments (Fredrickson & Mitchell, 1984).
In contrast, according to Eisenhardt (1989) as well as Miller and Friesen (1983), rational decision making is more suited to dynamic environments. Specifically, according to Eisenhardt (1989), in these dynamic and unpredictable environments, the cognitive speed and capacity of decision makers tends to be accelerated. That is, in these environments, individuals consider a broader range of alternatives and information sources, as well as integrate these considerations, more efficiently. These cognitive operations, therefore, are more likely to differentiate thriving from deteriorating firms in dynamic environments. Some studies support this perspective. As Miller and Friesen (1983) showed, in firms that performed well, dynamic environments promoted rational planning (see also Glick, Miller & Huber, 1993).
Priem, Rasheed, and Kotulic (1995), however, argued that many of these studies can be criticized. Key factors, such as the size of organizations, autonomy of decision makers, scope of products, and the industry itself were seldom controlled. Alternatively, only a subset of industries were typically examined. Furthermore, retrospective reports of the decision making process werere sometimes analyzed--reports that are often biased.
Priem, Rasheed, and Kotulic (1995) conducted a study that overrides many of these limitations. The sample included independent manufacturing firms, rather than subsidiaries, that employed over 100 individuals and generally operated in only a single SIC code, such as underwear or light globes. CEOs of these firms completed questionnaires. The questionnaire included a measure of environment scanning, analysis and planning, representing rationality, as well as a scale that assesses environmental dynamism. To measure performance, respondents ranked the firm, relative to rivals, on sales growth, sales, assets, and overall performance.
The results were clear. Generally, rationality was positively related to firm performance when the environment was highly dynamic. Rationality was not related to firm performance when the environment was not dynamic. Thus, comprehensive analysis seems more important in dynamic environments.
Wang and Li (2008) also generated some data that is relevant to this topic. They distinguish two forms of information search: exploitative and explorative. Exploitative search revolves around applying and generating knowledge from existing expertise and procedures. Explorative search revolves around applying and generating knowledge from other sources of information, beyond existing expertise and technology. That is, explorative search reflects a conscious effort to transcend existing knowledge.
Explorative search often enhances innovation, as measured by patent citations, for example. Nevertheless, if explorative search is excessive, innovation can decline, partly because resources are squandered. This detrimental effect of explorative search, however, diminishes when the environment is dynamic. In these dynamic contexts, even excessive explorative search could, occasionally, uncover some important insights.
In short, environment scanning, analysis and planning seems important in dynamic environments. Nevertheless, undue reliance on customer feedback can be detrimental.
To demonstrate, organizations can adopt a variety of strategies to export their products or services. They can, for example, continuously update their procedures, tactics, and strategies in response to feedback they receive from customers, suppliers, and other key stakeholders. In contrast, in some organizations, managers are encouraged to experiment with novel approaches to stimulate exports--demonstrating entrepreneurial skills and trusting their intuition.
As Balabanis and Spyropoulou (2007) showed, if the environment is stable and predictable, organizations that continuously update their procedures, tactics, and strategies in response to feedback demonstrate excellent growth. In contrast, if the environment is unstable and dynamic, this approach seems to damage growth. Presumably, when the market is competitive and unstable, this sensitivity to feedback can compromise the consistency and efficiency of workplace practices. These organizations overreact to minor requests and events.
Instead, in these dynamic environments, organizations should encourage managers to trust their intuition, experimenting with novel approaches to stimulate exports. This entrepreneurial approach, which is positively related to growth in dynamic environments (Balabanis and Spyropoulou, 2007), might enable individuals to access their core values and intuition, which can optimize decisions in complex situations (see Unconscious thinking theory; Dijksterhuis, 2004).
Some export strategies are not especially effective, regardless of whether the environment is dynamic. For example, organizations that adopt a clear, systematic set of procedures, tactics, and strategies to export their products and services are less successful in their endeavor to increase exports. A participative approach, in which organizations enable a diversity of employees to contribute to the export strategy, is also seldom effective (Balabanis & Spyropoulou, 2007).
Wijbenga and van Witteloostuijn (2007) argued that an internal locus of control in leaders might be beneficial in dynamic, but not in stable, environments. Specifically, in dynamic environments, innovation is an appropriate strategy. Innovative leaders can respond flexibly to changes in the market. That is, firms thrive if they often change their products or services, refine their processes and procedures, seek markets they have not pursued before, and spend considerable money on research and development.
In stable environments, this innovation is not as effective. Changes are not desired, and thus innovation can be inefficient. Instead, inexpensive strategies are more effective, such as incremental changes rather than strategic shifts, reduction in advertising, and low prices.
Generally, leaders who adopt an internal locus of control, in which they feel they can influence outcomes, tend to prefer an innovative, entrepreneurial approach, which Porter (1985) calls differentiation. Nevertheless, in dynamic environments, they inhibit this innovative strategy. Specifically, in these dynamic environments, they do not experience their usual capacity to control the outcomes. Their usual inclination towards innovation dissipates (Wijbenga & van Witteloostuijn, 2007).
Conversely, leaders who adopt an external locus of control prefer to diminish costs. To diminish costs, routines and procedures need to be followed--an orientation that individuals with an external locus of control prefer. That is, individuals with an external locus of control, who ascribe outcomes to factors they cannot govern, do not like to rely on their own initiative or ingenuity. They will, therefore, feel motivated to adhere to procedures.
Nevertheless, in stable environments, leaders who adopt an external locus of control may not always prefer to diminish costs, which Porter (1985) calls cost leadership. In dynamic environments, individuals with an external locus of control might feel especially stressed. In this state, they might resort to their preferred orientation, which is to curb costs rather than promote innovation (Wijbenga & van Witteloostuijn, 2007).
Consistent with these propositions, internal locus of control in leaders was positively related to innovation strategies, but only when the environment was stable. External locus of control in leaders was positively related to low costs strategies, but only when the environment was dynamic (Wijbenga & van Witteloostuijn, 2007). This finding is quite disconcerting: Leaders with an internal locus of control may tend to demonstrate undue levels of innovation in stable environments; leaders with an external locus of control may tend to demonstrate undue levels of cost leadership in dynamic environments.
Many studies have uncovered the benefits of charismatic leadership (e.g., Den Hartog, De Hoogh, & Keegan, 2007), in which leaders promulgate and promote an inspiring vision of the future as well as align their behavior to these values. De Hoogh, Den Hartog, Koopman, Thierry, Van den Berg, Van der Weide, and Wilderom (2004), however, showed the benefits of charismatic leadership are more pronounced when the environment is dynamic or uncertain.
In particular, De Hoogh, Den Hartog, Koopman, Thierry, Van den Berg, Van der Weide, and Wilderom (2004) showed that employees are more likely to adopt positive attitudes towards work when their leaders are charismatic. This relationship, however, was especially pronounced when the environment was uncertain or dynamic.
Waldman, Ramirez, House, and Puranam (2001) also uncovered comparable findings. In particular, as Waldman, Ramirez, House, and Puranam (2001) discovered, charismatic leadership was related to the net profit margin of organizations. This relationship, however, was observed only when the environment was uncertain.
These findings align with situational strength theory. In particular, according to Shamir and Howell (1999), when environments are dynamic and uncertain, few cues and constraints guide or constrain the behavior of employees. A novel interpretation and perspective is needed to guide behavior, instill clarity, and thus motivate employees--a need that charismatic leaders might fulfill.
Many scholars argue that directive leadership, in which leaders impose definitive goals and demands, reprimanding employees who breach these expectations, is often ineffective (e.g., Cruz, Henningsen, & Smith, 1999). Nevertheless, as Hmieleski and Ensley (2007) showed, directive leadership can be more effective than empowering leadership, in which employees are granted more autonomy and discretion, in some circumstances. Specifically, in dynamic environments, the performance of recent ventures was better when the leaders were directive--provided the management team was heterogeneous. In stable environments, the performance of recent ventures was better when the leaders were directive, but only when the management team was homogenous.
Hmieleski and Ensley (2007) presented some arguments to explain these findings. When the environment is dynamic, decisions need to be reached efficiently. Directive leaders might focus the attention of heterogeneous teams, who offer many perspectives, to the key issues and thus circumvent more exhaustive and inefficient considerations.
In contrast, when the environment is stable, empowering leaders can extract important opportunities from heterogeneous teams. In these contexts, these teams are granted the time and opportunities to explore complexities in depth and to optimize decisions. Directive leadership is perceived to stifle conversation without justification. If the team is homogenous, and discussion is not as important because many perspectives are already shared, this directive approach might be accepted.
Goals and aspirations
According to Wiklund and Shepherd (2003), environmental dynamism also offers more opportunities for small businesses to grow. As a consequence, if the aspirations of small business managers are elevated, actual growth should increase, especially in dynamic environments--an assumption the authors substantiated empirically (Wiklund & Shepherd, 2003).
Specifically, in this study, growth aspirations were first measured. Participants, all of whom managed small businesses, answered questions that ascertained whether they want to the number of employees to grow. In addition, actual growth in sales and number of employees was assessed over a three year period. Finally, the scale developed by Miller (1987) was used to assess environmental dynamism. As predicted, growth aspirations translated to growth, especially if the environment was dynamic.
In dynamic environments, the emotional capability of organizations become more important. That is, some organizations show emotional capability: Encouragement, playfulness, and other positive orientations pervade the workplace. Some facets of this capability are positively associated with workplace performance; environmental dynamism moderates this relationship, however (Akgun, Keskin, & Byrne, 2008).
Specifically, in the study conducted by Akgun, Keskin, and Byrne (2008), employees in Turkey completed a questionnaire. The questionnaire assessed emotional capability, which entails playfulness (e.g., "Our firm creates a context that encourages experimentation"), encouragement (e.g., "Managers in our firm infuse hope and joy in the organization"); display freedom (e.g., "In our firm, people are encouraged to express their full range of emotions without fear of reprisal"); identification (e.g., "People defend our firm's name and reputation outside work boundaries"); experiencing (e.g., "People in our firm communicate their emotions with others'); and reconciliation (e.g., People in our firm retain their private feelings while understanding those of others"). The questionnaire also assessed environmental dynamism as well as firm performance and effectiveness, relating to profit, growth, customer satisfaction, learning, and cycle times.
Encouraging, displaying freedom, identification, and experience were positively related to performance or effectiveness--and these relationships were often pronounced in dynamic environments. In contrast, playfulness and reconciliation were sometimes inversely related to performance or effectiveness, especially in dynamic environments.
Most of these emotional capabilities instill in individuals the confidence, security, and clarity to negotiate the complexities and uncertainties of dynamic environments. In these environments, however, reconciliation of diverse perspectives might not be productive--these perspectives might be needed to withstand the complexity of change. Furthermore, in these environments, undue experimentation and playfulness can translate into overwhelming levels of information and change (Akgun, Keskin, & Byrne, 2008).
Consequences of environmental dynamism
Sidhu, Volberda, and Commandeur (2004) argued that environmental dynamism might foster an exploration orientation, in which organizations attempt to acquire more information. That is, environmental dynamism, together with a strong mission and abundant resources, was positively related to a measure of exploration orientation.
Specifically, in this study, to measure exploration orientation, three facets were examined: the acquisition of supply side, demand side, and geographic information. A sample item for each facet respectively is "We are well aware of technological and technical developments within our industry", "We know well the product and process innovation efforts of our customers", and "We are knowledgeable about all important opportunities in the geographic regions in which we operate". This measure was positively related to a short scale, designed to measure environmental dynamism.
Presumably, when the environment is dynamic, managers feel more uncertain (e.g., Dess & Beard, 1984; Duncan, 1972). When managers feel uncertain, they might seek information more comprehensively and systematically (e.g., Daft & Weick, 1984), to diminish this sense of uncertainty.
Mechanisms that underpin the effects of environmental dynamism
Most of the effects of environmental dynamism are ascribed to feelings of uncertainty in managers (e.g., Dess & Beard, 1984; Duncan, 1972). Uncertainty can generate a series of psychological responses (for a review, see Subjective uncertainty reduction theory). For example, when managers feel uncertain, they might seek information more comprehensively (e.g., Daft & Weick, 1984), to diminish this sense of uncertainty.
Related to the issue of uncertainty, according to Shamir and Howell (1999), when environments are dynamic and uncertain, few cues and constraints guide or constrain the behavior of employees. The situation is considered weak, according to situational strength theory. Hence, individuals are more receptive to sources of information that can provide clarity and guidance, such as charismatic leaders.
Measures of environmental dynamism
Several scales have been developed to examine environmental dynamism. A set of related scales were developed by Miller and associates (Miller & Friesen, 1983; Miller, 1987). For example, Miller and Friesen (1983) developed five bipolar items, such as "Demand and consumer tastes are fairly easy to forecast" versus "Demands and tastes are almost unpredictable". Specifically, the questions relate to stability or unpredictability of marketing practices, products, services, technology, and actions of competitors. In their study, this measure of dynamism was positively related to innovation. Miller and Friesen (1983) also developed two other related scales: environmental heterogeneity and environmental hostility.
Some researchers administer a series of scales to gauge environmental dynamism. To assess environmental dynamism, De Hoogh, Den Hartog, Koopman, Thierry, Van den Berg, Van der Weide, and Wilderom (2004) assessed environmental uncertainty and technological change within the organization. Their measure of environmental uncertainty was derived from Khandwalla (1976). Participants evaluated the extent to which the environment, external to the organization, was safe, risky, hostile, and predictable on a series of bipolar items. Furthermore, this measure assessed whether governments often introduced additional regulations and whether technology changed rapidly in this industrial environment. The measure of technological change within the organization was also adapted from items reported by Khandwalla (1976). A sample item is "How often did significant technological change(s) in this organization occur during the prior three years".
Some authors have developed a set of scales that are specific to environmental dynamism. Akgun, Keskin, and Byrne (2008), for example, adapted a measure, developed by Paswan, Dant, and Lumpkin (1998), to measure environmental dynamism. This scale comprises 9 items. Three of the items represent dynamism in industry, especially in the products and marketing strategies, epitomized by items that represent the frequency of "Changes in mix of products/brands carried in the industry". The same three items were then repeated, except applied to changes in competitors rather than in the industry. The final three items represented dynamism in consumers, such as the frequency of "Changes in consumer preferences in product features".
Environmental dynamism is sometimes derived from objective measures (e.g., Dess & Beard, 1984; Sharfman & Dean, 1991; Hmieleski & Ensley, 2007). Specifically, researchers undertake a series of regression analyses to examine the extent to which industry revenue, number of establishments in the industry, number of employees in the industry, as well as investment in research and development vary across time. These figures might be derived from various databases. Each of these measures represents the criterion and time represents the predictor. For each regression, the standard error is divided by the mean of each measure, to generate an index of instability.
Sharfman and Dean (1991) developed a formula that, in essence, combines these indices of instability to represent environmental dynamism. This measure of environmental dynamism, thus, represents the degree to which growth in the industry and in research and development is erratic, rather than steady, over time.
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Created by Dr Simon Moss on 22/03/2010
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