Environmental Uncertainty as a Contingent Factor of Business Strategy Choice Decision: Introducing an Alternative Measurement of Uncertainty

Abstract

This study aims to examine a contingent factor of business strategy decisions, namely environmental uncertainty. The study applies secondary data as an alternative method to analyze technological uncertainty: a component of environmental uncertainty. To examine environmental uncertainty, this study develops an Environmental Uncertainty Index (EUI). Utilizing a sample of manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the period from 2009 to 2012 and a multinomial logistic regression, this study finds that the probability of a company pursuing a prospector strategy is greater than an analyzer strategy. Notwithstanding, the study fails to prove that the probability of a company opting for a defender strategy is greater than an analyzer approach. The findings suggest that the new measure of technological uncertainty is more applicable than the other existing measures. Furthermore, EUI measures the environmental uncertainty objectively, therefore, this new measure could be applied to future research. In general, this study broadens understanding concerning the relationship between business strategy and its contingent factors, namely environmental uncertainty. KeywordsBusiness strategy, contingent factor, environmental uncertainty, Indonesia. AbstractThis study aims to examine a contingent factor of business strategy decisions, namely environmental uncertainty. The study applies secondary data as an alternative method to analyze technological uncertainty: a component of environmental uncertainty. To examine environmental uncertainty, this study develops an Environmental Uncertainty Index (EUI). Utilizing a sample of manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the period from 2009 to 2012 and a multinomial logistic regression, this study finds that the probability of a company pursuing a prospector strategy is greater than an analyzer strategy. Notwithstanding, the study fails to prove that the probability of a company opting for a defender strategy is greater than an analyzer approach. The findings suggest that the new measure of technological uncertainty is more applicable than the other existing measures. Furthermore, EUI measures the environmental uncertainty objectively, therefore, this new measure could be applied to future research. In general, this study broadens understanding concerning the relationship between business strategy and its contingent factors, namely environmental uncertainty.JEL Classification: L10, L20, M14.

The effect of uncertainty on the formulation of strategies: a study of selected Indian organizations

“…Some scholars have conceived uncertainty as the objective dimension of the external environment, while others have viewed uncertainty as the interpretation of the perceptual process that helps decision-makers in conceptualizing the environment (Milliken 1987a, b). Arieftiara et al (2017), Duncan (1972), and Lawrence and Lorsch (1967) presented some important measures of uncertainty, which the present study builds upon. Lawrence and Lorsch (1967) identified the uncertainty variables associated with departments, such as research, manufacturing, and marketing, and assessed the degree of uncertainty within the three different organization subsystems.…”

“…Extant studies have found that organizational design is often influenced by the uncertainties that prevail in the business environment (Latan et al 2018;Lawrence and Lorsch 1967). Past studies (e.g., Arieftiara et al 2017;Dill 1958;Duncan 1972;Lawrence and Lorsch 1967;Singh 2020) have attempted to gauge the "objective", as well as, the "perceived" environmental uncertainty, and to examine the relationship between these "objective" and perceptual measures. Attempts to measure the "effect" of such environmental uncertainty on the strategy formation within an organization is not so frequent, with Venkataramanaiah and Kumar's (2011) and Arieftiara et al (2017) review papers presenting contemporary reviews on the subject.…”

“…Kundu (2014) developed a liner programming model to estimate the effect of design parameters namely, uncertainty reduction, differentiation and integration, on the performance of organizations. Arieftiara et al (2017) examined environmental uncertainty and developed an environmental uncertainty index (EUI) for Indonesia. Using a sample of manufacturing companies listed on the Indonesia stock exchange (IDX) for the period from 2009 to 2012, and a multinomial logistic regression, Arieftiara et al (2017) found that the likelihood of an organization pursuing a prospector strategy is greater than an analyzer strategy.…”

“…Studies on environmental uncertainty reached the epitome of acceptability in the 1970s and has since fallen off noticeably (Arieftiara et al 2017;Milliken 1987a, b;Venkataramanaiah and Kumar 2011). It is suggested that one of the reasons for this decline in interest is that the outcomes of the studies were not easily implementable (Milliken 1987a, b), and they do not provide an objective measure of the uncertainty (Arieftiara et al 2017).…”

“…The networking behavior of executives also needs to be tailored to the environmental uncertainty to achieve higher performance (Srivastava et al 2018). Arieftiara et al (2017) emphasized upon the need to develop an environmental uncertainty index since business systems are subsystems of the overall business environment.…”