The Influence Environmental Factors on Corporate Structures - Essay Example

Economics Introduction Big business organizations that were regarded as unwieldy sometime back are now in vogue again. There are both theoretical and empirical parameters supporting this turnaround in the corporate environment. For instance big business organizations have come around to realize the significance of environmental factors on corporate strategy along with developing a special set of skills by leaders and managers to align corporate strategy with the competitive pressures of the time (www.economist.com). This paper investigates the influence these environmental factors on corporate structures and strategy. Next it delineates the strategic choices at the disposal of corporate entities in the process of planning and policy making. The study also focuses on the strategic significance of the changes that have taken place in the corporate environment over the years since the times of such catchy phrases like Schumacher’s “small is beautiful”. Analysis According to the lead article in the Economist on the 29th of August 2009 big corporate entities are coming in to vogue again because they have discovered a master strategy to survive in the all too important strategic competitive environment. By extension environmental factors play a very significant role on the corporate strategy and policy making environment. The extent to which such environmental factors play a role in determining the directional thrust of the corporate strategy of the big business corporation concerning competition and corporate social responsibility (CSR) can be known through an analysis of the theoretical approaches recommended by modern management gurus. This paper would adopt the five principle environmental factors suggested by Pearce & Robinson (2002). The authors suggest a theoretical framework of five significant environmental factors in order to enable leaders and managers of corporate entities to understand the nature and the extent of the impact that environmental factors have on business organizations. Above all according to the authors big businesses are more and more affected by them. The significance of environmental factors Customers Customers are very important for the business organization in determining its corporate strategy. For example customers can either make or break a business organization on the basis of demand. The emerging big corporate entity depends on customers’ perceptive behavior to such an extent that the former has very little freedom in deciding the corporate strategy and production policy in any other possible way. The purchasing power of the modern customer is unlimited because e-commerce and e-money have comes so far as to influence the customer’s purchasing decisions and choices in a manner that the customer might not resist the temptation to buy today and pay tomorrow. Thus it is as simple as selling today the tomorrow’s need. Competitors According to the authors competitors play a very important role in the corporate strategy and policy planning environments of the business organization. For instance depending on the structure of the business organization and the structure of the market competitors constantly change their own strategy in order to remain competitive against other rivals. Thus the fluidity of the market environment and the internal organizational setup invariably influence the corporate strategy of the big business organization. The size does not matter anymore because it is not the size that determines competitive capabilities but the ability of the management to adapt the corporate strategy and the policy planning environment to suit the changing nature and scope of the competitive pressures. These competitive pressures acquire a new dimension against the backdrop of the evolving strategic corporate environment. Competitors have probably the greatest impact on corporate structure and strategy of the modern business organization due to the dichotomous policy framework associated with competition and the expansion. Competitive pressures force business organizations to expand the scale of operations beyond their immediate market environment. However rather than the scale related economies what matters is the strategic process that has to be adopted in corporate planning and policy making environment. For example business policy planning and making involves a series of interconnected links with both the corporate strategy and environmental influences. Recent developments in the sphere of competition in Europe show as to how far regulatory requirements could affect competition related outcomes. Thus a variety of business organizations in different sectors of the economy have made a persistent effort to reorient the strategy towards meeting these new challenges. Suppliers In the corporate environment of business planning and strategy suppliers have a far reaching impact on the organizational outcomes concerning competition and day-to-day operations. Supply chain management strategy is part of the corporate strategy and therefore suppliers tend to impose conditions on the corporate entity to such an extent that the decision making process might be subject to external pressures even if the business organization does not tolerate them. Supplier networks are essential for the business organization to design plan and execute its business policy and therefore suppliers as a stakeholder group operating in the external environment exert pressure on the very orientation of the corporate strategy and business policy. The former is distinguished form the latter in that it is a long term perspective of what the business should do as against the latter which is short term perspective. Suppliers adopt their own strategies in order to meet contingency demand by firms. In the larger context of the market the individual firm has much less power to influence suppliers. As a result suppliers tend to change their strategy according to the shifts in demand. Assuming a greater degree of pressure on supplier networks coming from greater market demand, suppliers would up their stake in the ultimate outcomes of the corporate strategy and business policy. This is the inevitable result of growing supplier power in the wake of big business organizations becoming more and more dependent on supplier networks to expand business. Creditors Creditors play an equal important role on the corporate strategy and business policy of the big corporate entity. They also have a considerable amount of influence over the strategic policy making process of the firm. Despite the diversity and the complexity of sources of credit available to the average business organization, creditors both institutional and non institutional play a very decisive role in determining the corporate strategy of the firm. This can be noticed in respect of both the direction and the volume of credit flow. Big businesses depend on institutional creditors like commercial banks, financial houses, building societies, investment funds and so on to a greater extent due to the fact that the former are unable to initiate big changes without fund commitments stretched and planned for a longer period ahead. Only institutional lenders can commit themselves to such long term lending programs stretching over a number of years. Labor Markets Pearce & Robinson discuss the influence of labor markets on business organizations and their ability to design and implement long term corporate strategies to effectively face competition and survive. This environmental influence according to the authors has a number of facets. In the first place labor markets operate on their own with market forces – demand and supply – acting as the ultimate determinants of equilibria. For instance labor markets are the most difficult to be regulated because supply factors are not the same as those associated with other goods and services. Further employees are mostly members of trade unions and therefore supply of labor can be subject to some unpredictable changes overnight. In the absence of a proper human resource management (HRM) policy problems like poor turnover, absenteeism, redundancy and inefficiency might occur. It is for the firm to expand its business through meaningful strategic relations or partnerships. For example the management of the company can hire services of a strategic recruiter who has sufficient knowledge of labor markets and employee behavior. Business organizations become unwieldy when their HRM departments go out of control due to poor HRM policies. Environmental Influences and corporate strategy Environmental influences have been studied under different acronyms such as PEST, PESTLE and STEEPLE. Whatever the acronym the influences can be categorized under political, economic, social, technological, legal and environmental headings. Many of them are just analyzed to understand the degree of influence on the strategic decision making process of the company. The following explanation of the increasing popularity of the big business organization yet again is based on the acronym PESTLE. Political Influences External environmental influences on the business organization are of different categories. Political influences on the corporate strategy and structure of the business organization can be investigated with a reference to the current scenario of internal management structures becoming flatter in order to meet the challenges forced by external environmental pressures, especially political. For instance, in Europe the fall and rise of the business organization are attributed to the same political process but with two different phases. The second phase is a reversal of the first phase. Political developments in Europe and North America took a turn in the late 1980’s. This process continued till the early 2000’s and now the reverse process applies. In other words governments have changed their attitudes towards the outgrowth of big businesses. The revulsion for Enron and World.com has changed in to acceptance. The belief that big businesses fail because they are being mismanaged is no more in vogue. This belief has been replaced by a new tendency to accept the proposition that big business organizations are able to face bigger challenges if they are able to focus attention on the significance of the external environmental factors and influences on their corporate structure and strategy. The European political landscape has changed with respect to attitudes towards big business. The corporate entity is no more a burden on the government’s policy planning task because every business organization has a very strong desire to continue operations though the severity of external environmental influences would heavily impact on the organization’s ability to survive. In this respect the internal corporate structure matters as much as the strategy related capabilities matter. For example the privatization programs of the successive British governments have transformed loss incurring government corporations in to modern public limited companies. The internal corporate structures of these entities have been transformed over time in the process. Now they are much flatter horizontal hierarchies with much less number of layers from top to bottom. Thus both the management structure and the policy decision making hierarchy have become shorter. The external political pressures have ceased on the internal management and strategy. However according to modern management gurus business organizations grow with time and space mostly disregarding a political environment due to the competition related requirements. Economic Influences Economic influences on the business organizations policy decision making process and corporate strategy have been discussed against backdrop of an evolving environment of change. Despite the current economic downturn the small is beautiful concept has been relegated to a secondary place. This is because of the fact that big business organizations are becoming more popular because their survival is directly proportional to the size of the market rather than the manageability. Compact small business organizations have been described as economically unproductive in times of economic recessions because their excessive dependence on internal organizational capabilities leads to poor decisions. On the other hand the success of big firms has been attributed to their ability to raise both debt and equity capital and the relative size of the market. In the first place economic recessions dent on the firm’s ability to raise capital. Since the market value of the firm is affected by the way in which the capital is structured, managers might prefer to raise debt instead of equity thus bringing down the value of the firm in the eyes of the investor. Subsequently shareholders might be compelled to sell their shares at lower prices. In such a scenario big corporate entities are able to survive on pre commitments made by institutional lenders who will not hesitate to buy debt instruments like corporate bonds and debentures in times of economic recessions. The size of the market is sought to be preserved by big business organizations on the ground that any vacuum left behind by a declining company would be immediately filled by competitors. The main argument behind this environmental influence on the long run survival of the big business organization is centered on the fact that the firm has to sell a minimum portfolio of products in the long run to avoid being pushed out of the market. Thus product differentiation and diversification strategies can be adopted by big firms without much difficulty. Social Influences Social influences tend to be generated in the context of the big business organizations diverse operational environments. Big business organizations have become successful because they can afford to identify and target niche markets in every part of the geographical expanse with much less cost. For example the modern corporate entity has the capacity to reach out to variety of niches in different parts of the market where those niches represent cultural market segments. From product labeling to product placement and form pricing strategy to promotion, the big business organization has a particular advantage over the small firm by way of strategic initiatives of expansion and policy decision making independence for unit heads. Technological Influences Big corporate entities are better able to increase their productive capacity by way of new investments on new technology. Small businesses are seemingly unable to investing new technologies because their market size and the level of operations do not allow them to go for expensive technologies. Strategic decision making processes of big corporate entities are basically determined by long term capacity development. This process requires investments in new technology. As a result small firms cannot afford to invest in long term strategic orientation related projects. The net benefits that big corporations have are associated with not so much the scale of operations, but with the cost saving capacity enhancement. For example new technologies including information and communication technology (ICT) have enabled big business to achieve non scale related economies in respect of efficiency, sales volumes and profits. Legal or Regulatory Influences Legal or regulatory influences make it increasingly difficult for small firms to continue in business irrespective of the economic situation. Even in good times the regulations would have a very negative impact on small firms. On the other hand big business organizations have been able to adopt compliance measures with much less hassle. Compliance with regulations, especially quality standards requires the setting up of specialist departments that are manned by people with experience and expertise. Small firms cannot afford to employee such personal or set up specialist departments. Thus it is obvious that the corporate strategy of the big firm goes with the requirements of time and space. In fact most of the EU regulatory environment favors big businesses. This is the most difficult truth that small firms trying to survive against the current global economic downturn are faced with. Environmental Influences Environmental influences have also favored big firms because environmental factors such as those related to production processes, dumping of chemicals, treatment of chemicals and the installation and maintenance of treatment plants have all favored big businesses. Therefore it is not difficult to see why big firms are becoming more popular. Strategic business policy making processes are very increasingly subject to environmental influences due to two main reasons. In the first place the strategic policy decisions are made in the context of the company’s evolving corporate strategy. As such the management needs to pay attention to such factors as corporate governance which involves adopting policies that would benefit both employees and the extended community of customers. Such policies require investments in equipment that would minimize damage to the environment. Only big businesses can afford to spend on such programs. Conclusion In conclusion it must be noted that big business organizations have a better chance of survival than smaller firms. Thus the process of decline to which large companies have been subject is being reversed. The corporate structure and strategy of the big firm are better able to absorb the influences of environmental factors better than that of the smaller firms. The environmental agents such as competitors, customers, suppliers, creditors and labor markets have all been influencing the big business organization to develop special capabilities other than those related to scale economies to successfully overcome the challenges of time. Finally large companies have been able to reorient their business planning and policy making environments to suit the requirements of time. In this regard external influences represented by the acronym PESTLE have played a very decisive role in favoring large companies against small companies. REFERENCES 01. Pearce› Visit Amazons John A. Pearce Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central , JA Robinson, RB 2002, Strategic Management, McGraw-Hill Education, New York. 02. ‘Big is back, the return of the corporate giant’, the economist, viewed November 14, 2009 www.economist.com. Read More