Characteristics of a Dynamic Environment in Strategic Management

Dynamic business environments, such as those that companies encountered in 2008, 1980 and 1973, are characterized by fluctuating risk and instability. Heightened transparency, new technologies, globalization and political upheaval can combine to alter a company's business environment drastically. This occurrence can set many a CEO back on their heels.

Any battle-weary business leader recognizes that a dynamic environment has consequences.

For example, a volatile environment can negatively impact operating margins that were relatively static before the upheaval.

For example, the average operating margin for the S&P 500 for the year 2018 was 10.7 percent, but in November of 2002, that average was a little less than 2 percent.

The 8.7 percent differential in operating margins between 2018 and 2002 is significant when you consider that the ratio of operating income to net sales reveals. The operating margin – the portion of each dollar of revenue that remains after costs of goods sold and operating expenses are deducted – is key to understanding how successful a company is in generating operating cash flow.

A dynamic business environment can wreak havoc on operating margins and a company's ability to satisfy creditor claims and create shareholder value. It's essential to consider the possibility and effect of a volatile environment when planning and implementing a strategic plan.

For purposes of strategic planning, an environment is dynamic in nature if it is affected by a variety of factors, such as technological, socio-economic, governmental, legal, and competitive and supply chain events. The more readily that any of these factors change, the more dynamic the company's operating environment.

The more volatile and complex an operating environment, the larger the number of changes, the greater the significance of those changes and the more frequently the changes occur. The larger the number of changes, the greater their significance, and the more frequent the changes, the greater the risk that change has a significant positive or negative impact on a company's strategic management functions and its operations.

Any adverse effects are compounded by management's failure to understand the changes and their effects.

When rapid or sudden change occurs, such as technological innovation or political upheaval, the environmental dynamism that results may negate a company's long-held competitive advantage. Most certainly, the turbulence affects market conditions that underscore a company's strategic plan and makes strategic management processes more difficult.

Strategy is a plan of action that's designed to achieve a goal. During the typically systematic and detailed planning process, participants make decisions related to actions employees will take, such as using certain financial or physical resources to achieve agreed-upon strategic goals.

If a company is to remain viable in a dynamic environment, it must respond quickly to rapid changes with new or revised strategic options. The more adaptive and flexible a company, the better its performance will be in unpredictable times.

This adaptability requires that management encourage personnel to develop flexible competencies and the capabilities they need to understand and respond to environmental changes in an appropriate manner.

A dynamic environment can significantly curtail a company's efforts to accomplish established goals, such as increasing market share or establishing a beachhead in another country. What's worse, some strategic planning tools are ineffective in turbulent times.

For these reasons, the perception of strategy is changing from that of structured, detailed plans to guidelines that might be considered in certain situations.

This change in concept, however, doesn't negate the usefulness of thinking through the actions a company might take given a certain set of circumstances.