How Environment Affects Organization

The effect of environments on the organization can be studied from three basic perspectives. The points of how the environment affects organization are explained below:-

A. Environmental change and complexity-

The business of the environment consists of all components of the surroundings of a business organization,  which affect or influence its operations and determine its effectiveness. James D.Thompson, a management scholar, describes the importance of the environment to the organization. He suggests that the environment can be described along two dimensions: the degree of change and degree of homogeneity. The degree of change is the extent to which the environment is relatively stable or dynamic.

The degree of homogeneity is the extent to which the environment is relatively simple or relatively complex. The interaction between the degree of change and degree of homogeneity determines the level of uncertainty faced by the organization.

According to James D. Thompson, he classifies three degrees of uncertainty on the basis of the degree of environmental change and degree of environmental homogeneity. When the degree of change in the environment is stable and the degree of homogeneity is simple, the organizations face the least uncertainty in their operations. Similarly, very dynamic and complex environmental conditions yield a high degree of uncertainty.

B. Competitive Forces

1. The threat of new entrants- The threat of new entrants is fairly high for local products and services that require low capital investment.
2. Competitive rivalry- Competitors involve in a price war, competitive advertising and new product introduction.
3. The threat of substitute products- Manufacturers and dealers of existing products or services may face a threat in the market.
4. Power of buyers- The purchasing power of buyers influences the market share of the manufacturers and suppliers.
5. Power of suppliers- It is the ability of suppliers to influence potential buyers.

C. Environmental Turbulence

Natural calamities like earthquakes, volcanoes, landslides, floods, etc create turbulence in a business organization.