Predicting Future Profits

Characterizing the environment is useful for managers when trying to understand how the environment influences their organization. However, some environmental conditions are easier to understand and predict than others. Any manager examining the same environment should arrive at the same conclusion on what domains the factors are located in and where the organization resides within the environmental dimensions. This will occur if all managers have full information about the environment. However, managers rarely have the opportunity to make judgments based on total information. Indeed, much information about the environment may be absent or erroneous. Hence, many environmental evaluations are subjective and lead to disagreements among managers about the true condition of the environment.

When managers do not have information or have incorrect information about environmental factors, they have a difficult time predicting external changes. When this occurs, managers must decide under conditions of uncertainty. As uncertainty increases, so also does the risk that managers will make decisions that harm rather than help the organization. Five types of managerial uncertainty can lead to poor decisions:

•Uncertainty about information availability, accuracy, and clarity
•Uncertainty about cause-effect relationships
•Uncertainty about outcome preferences
•Uncertainty arising from the time span needed for definitive feedback
•Uncertainty arising from the inability to assign the probability of an outcome

Research suggests that uncertainty will increase for organizational managers when the environment becomes lean, heterogeneous, unstable, dispersed, turbulent, and is in a state of dissensus. Each of these environmental conditions requires the gathering of more information. If the information is difficult to get or unobtainable, managerial uncertainty will increase even more.

Environmental dynamism and complexity can both create managerial uncertainty in different degrees. A manager in an organization such as a manufacturer of cardboard containers, should experience low uncertainty because the environmental factors are basically similar and stable over time. Managers of organizations in stable environments like in companies producing canned foods serve different types of customers, but the demands and needs for such products change little over time.

Companies that produce country music albums are facing more instable environments. The artists are similar, as is the method of producing the albums, but the demand for the music varies as does the popularity of the performing artists. Managers in many airline and oil companies face the greatest amount of uncertainty because the factors in the environment are both unstable and complex.