How does the external environment impact the organisational structure of a firm?

Written by lalla scotter
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How does the external environment impact the organisational structure of a firm?
As organisations grow they develop different structures. (Hemera Technologies/ Images)

The organisational structure of a firm can be influenced by many factors, particularly its size and age. Young, small, fast-growing companies are often structured informally which makes them flexible and quick to change. As firms get larger they need to exert more control. This is when they become multi-layered hierarchies that operate efficiently but change slowly. But these internal factors are not the only influences on a firm's structure. Elements in the external environment also play a part.


Competition comes from other companies already operating in the same field, new companies being created, and existing companies moving into new markets. Firms operating in highly competitive environments need structures that support flexibility and innovation. Typically these are decentralised and flat structures, in which decision-making can be fast and locally specific. They should have no layers of management to slow things down.


Customers are the most important variable in a firm's external environment. They are the end-users of its products and services. In a stable environment, in which customers' needs and desires are well understood and likely to remain consistent, mechanistic, hierarchical structures work well. However, in a dynamic or turbulent market, in which customer demographics and preferences are changing fast, organisations choose structures that are more flexible and allow them to respond to environmental change more proactively.


Advances in technology are the most frequent cause of organisational change. Companies often take advantage of new technology to speed up processes. In a manufacturing company, for example, this can change the balance of the firm. There are fewer workers actually on the shop floor, and more employees become responsible for management of the technology. In some cases, new technology becomes a competitor. For example, the advent of e-commerce meant that many traditional retailers had to develop online sales arms.

Human resources

Organisations need a constant supply of suitable employees. The availability of potential workers of the right age and the right skills can vary, however. Organisations respond to these variations by opening offices in different locations and reorganising functions. They may also change their employment structures so that they outsource some functions or employ more people on temporary contracts.

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