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The Relationships Between Environment, Strategy, Organizational Structure,

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P a g e |2 Vol. 10 Issue 5 (Ver 1.0) July 2010 Global Journal of Management and Business Research

The Relationships Between Environment, Strategy,

Organizational Structure, and
Business Performance
GJMBR Classification
M. Irhas Effendi, Muafi, Miftahol Arifin* FOR: 150503,150505,150312
GJEL: M31,Q56

Abstract-This study will develop a model of relationship government and industry is very significant for
between the environment, strategy, organizational structures manufacturing industry, government, and society in order to
and business performance of the manufacturing industries in assist in achieving pro-growth, pro-job, and pro-poor.
Yogyakarta and Central Java. The population of this study are
all manufacturing industries in Yogyakarta and Central Java. II. LITERATURE REVIEW
The samples in this study are designed using Cluster Random
Sampling technique, guided by Standard Classification of The Relationship between Environment, Competitive
Indonesian Business Field [Klasifikasi Baku Lapangan Usaha Strategy, Strategic Orientation, Organizational Structure and
Indonesia] (KBLUI) in category D at digit 2. 250 samples are Business Performance
taken and based on the result of the questionnaire distribution, Since competition is a game, particularly for a company in
143 respondents answered the items completely, so this meets the turbulent environment, the competing company is trying
the requirement for Structural Equation Modelling (SEM). Six to find ways to sustain its success in the long term, which is
variables are considered: external environment, internal difficult to copy by its competitors. This means that the
environment, competitive stra tegy, strategic
company wants to gain its competitive advantage. It is
orientation, organizational structure and business
performance. Validity and reliability tests indicate that all
therefore required that it have competitive strategies leading
variables are valid and reliable. to a position of profitability and supporting capacity facing
Based on the data analysis, the findings are: (1) external the powers which determine industrial competition.
environments have positive influences to competitive strategies, In the opinion of Schuler and Jackson (1987), there are three
(2) internal environments have positive influences to strategies in an organization which can be used to gain
competitive strategies, (3) organizational structures don’t have competitive advantages; innovation, quality enhancement,
positive influences to competitive strategies, (4) competitive and cost reduction. These strategies can be pure for single
strategies have positive influences to strategic orientation, (5) units or in the functional areas, but these may overlap,
competitive strategies have positive influence to the business where business units or functional areas have two or more
performance, (6) competitive strategies have positive influence
competitive strategies simultaneously (Schuler and Jackson,
to organizational structures, (7) strategic orientation have
positive influence to the business performance, and (8) 1987). Kumar, et al. (1997) say that as a matter of fact, the
organizational structures have influence to the business type of Potter’s generic strategy is similar to that of Miles
performance. dan Snow. Defender (Miles and Snow) is similar to Low
Keywords-environment, competitive strategy, strategic Cost (Porter) and Efficiency. Prospector (Miles and Snow)
orientation, organizational structure, and business is similar to Differentiation/Innovation (Porter/Miller and
performance. Friesen`s). Porter explains that Cost Leadership and
Differentiation are mutually exclusive (Kumar, et al., 1997).
I. INTRODUCTION If both are combined they will get stuck in the middle. Cost
leadership and differentiation is combined with the focus
T he government expects that the manufacturing
industries could continuously improve
performance. Department of Industry in Indonesia has
their strategy, hybrid will take place. This does not necessarily
mean that that getting stuck in the middle may not happen.
focused and will focus its support on the manufacturing In one of the researches conducted by Kumar, et al. (1997)
industries until next year. The fact needing serious attention indicated that Porter’s generic strategies are not mutually
is that the performance of manufacturing industries has kept exclusive and each strategy can be connected to another
slowing down. In Indonesia, growing of manufacturing variation of strategy.
industry is very significant for manufacturing industry, Competitive strategic variations could create competitive
____________________________ advantages. What needs to bear in mind is that the condition
of getting stuck in the middle is unpredictable. As in the
About-*Dept.of Management Economic, University Pembangunan reactor strategy explained by Miles and Snow, stuck in the
Nasional Veteran Yogyakarta (UPNVY middle has never been proposed as a way to success
SWK 104 Ringroad Utara Condong Catur Yogyakarta Indonesia 55283
(Tel:+61811268639 Tel: +61811268639, +6181328058966, (Robbins, 1994). The reason is that both types of strategy
+61818265696 have a clear-cut characteristics, in extreme points and
We would like to thanks to Direktorat Jenderal Pendidikan Tinggi (Dirjen consistently adapting themselves with the variable
Dikti) Indonesia which had give grant to this research with scheme Hibah contingency in the company.
Bersaing 2007
Global Journal of Management and Business Research Vol. 10 Issue 5 (Ver 1.0) July 2010 Page|3

After considering the existing environmental aspect, the Alleyne, et al. (2005), Carmeli, (2004), Hoogervorst, et al.
choice of appropriate strategy is closely related to the (2002), Schuler and Jackson (1987). Therefore we propose
strategic orientation of the managers and the organizational hypothesis. This literature has been used to develop the
structures, which will have impact on the business‘s conceptual framework for this study as shown in Figure 1.
performance (Covin and Slevin, 1989; Robertson and
Chetty, 2000). The findings conclude that there is a causality
between environment, organizational structure, and strategic
orientation on the performance, If there is a synchronicity
between environment and strategic orientation,
organizational structure and strategic orientation, better
performance can be made.
Related to competitive strategies, Steers (1984) empirically
find that environment could influences strategies and
performance/organizational effectiveness, and environment
could influences organizational structures. This could Figure 1. The relationships between Environment, Strategy,
happen because different environments require different Organizational Structure, and Business Performance
organizational structures, and this will influences the
business performance. Steers (1984) highlights that new A. Hypothesis
strategies require new structures, so strategies will Based on the research model, this study hypothesis that:
influences organizational structures. This findings are H1. There is positive influence of external environment (EE)
supported by Miner (1982) and Hammond (1994) by adding to competitive strategies (CS).
a debate whether structure follows strategy or strategy H2. There is positive influence of internal environment (IE)
follows structure. In later development, there is a consensus to competitive strategies (CS).
that both could be implemented (Hammond, 1994). H3. There is positive influence of organizational structures
Therefore, there will be reciprocal influence between (OS) to competitive strategies (CS).
strategy and structure. H4. There is positive influence of competitive strategies
In general, environments can be categorized into external (CS) to organizational structure (OS).
environments and internal environments. Boyd et al. (1993) H5. There is positive influence of competitive strategies
explain how to measure environmental variables which can (CS) to the business performance (BP).
be viewed from two approaches: objective and perceptual. H6. There is positive influence of competitive strategies
Based on the approach of E-S-P (environment-strategy- (CS) to organizational structures (OS).
performance) paradigm model, environmental variables H7. There is positive influence of strategic orientation (SO)
could play an important role affecting the business‘ to the business performance (BP).
strategies and performance. Even the research of Adu H8. There is positive influence of organizational structures
(1999) finds that there is a direct influence of environment (OS) to the business performance (BP)
on the business performance.
III. RESEARCH METHODOLOGY
Steers (1980) explains that environment could influences the
roles of the managers which will influence the effectiveness There are six variables which are used in this research;
of the organization. The management will find it hard to external environment, internal environment, competitive
understand the complexity of the environment. The capacity strategy, strategic orientation, organizational structure and
of information processing management will be overloaded business performance. Validity and reliability tests indicate
and it will also implicate the decision made (Robbins, 1994). that all variables are valid and reliable. The population of
Researches dealing with the influence of environment on the this study are all manufacturing industries in Yogyakarta
management attitudes/roles/styles, particulary with and Central Java. The samples in this study are designed
managerial convictions and performance have been using Cluster Random Sampling technique, guided by
conducted by Coltman et al. (2003). Based on the model and Standard Classification of Indonesian Business Field
measurement, it is found that organizational condition [Klasifikasi Baku Lapangan Usaha Indonesia] (KBLUI) in
(feasible limitations, organizational condition) and external category D at digit 2. 250 samples are taken and based on
environment (market/technology and environmental the result of the questionnaire distribution, 143 respondents
pressure) could directly influences e-business performance, answered the items completely, so this meets the
and it could also indirectly influences e-business requirement for Structural Equation Modelling (SEM).
performance mediated by the managerial
convictions/attitudes/management styles. The general
IV. EMPIRICAL RESULTS ANF DISCUSSION
findings of several empirical researches also indicate that
strategy influences performance (Bou and Beltran, 2005); A. Descriptive Analysis
Edelman et al. (2005); Carmeli (2004); Priyono (2003, The number of questionnaires distributed is 250, with the
2004); Heijltjes (2003); Weinsten and Obloj (2002); Dyer response rate 57.2%. The following is the description of the
and Reeves (1995), strategy influencess strategic respondents. Table 1 shows the research data used, based on
orientations (Offstein et al., 2005); Edelman, et al., 2005),
P a g e |4 Vol. 10 Issue 5 (Ver 1.0) July 2010 Global Journal of Management and Business Research

The number of questionnaires distributed is 250, with the conservative strategic orientation, efficient competitive
response rate 57.2%. The following is the description of the strategies, and mechanical organizational structure. The
respondents. Table 1 shows the research data used, based on descriptive approach indicate that the managers of the
the sample target, realization for each area and industrial manufacturing companies in Yogyakarta and Central Java
groups. still have different perceptions about competitive strategies,
The description of research variables depicts that external strategic orientation, organizational structure, and
and internal environments tend to be perceived as hostile, environment to improve the business‘s performance.

See Table 2 for the evaluation of the test result of that model.

From the evaluation of proposed models, of all criteria used,

almost all are good, except probability. GFI, CFI and TLI
have marginal criteria. Based on the available explanation
referring to parsimony principle (Arbukle and Worthke,
Global Journal of Management and Business Research Vol. 10 Issue 5 (Ver 1.0) July 2010 Page|5

1999), if there is one or two criteria of goodness of fit which mediation: strategic orientations and organizational
meet the expected value, the model on the whole is good, or structures. This supports the previous researches and
the development of hypothesis model conceptually and confirms the truth of that integration model (Steers, 1980;
theoretically is said to be supported by empirical data. Robbins, 1994: 254; Covin and Slevin, 1989) and other
researchers. The researchers conclude that the paradigm of
B. Hypothesis Test
environment-competitive strategy-business performance
To test the hypothesis of causal relationship between could be integrated by considering other variables: strategic
external environment, internal environment, strategy, orientation and organizational structure. Next, we are going
strategic posture,organizational structure and business to discuss the most interesting finding of this research;
Competitive strategies influences the organizational
performance, the result of path coeficient could indicate this
structures but organizational structures do not influences the
causal relationship between those variables. See Table 3 for competitive strategies.
that relationship. Competitive strategies influences organizational structures.
This confirms the theory and research conducted by
Chandler (1962 in Steers, 1984) which highlights that a new
strategy will require a new structure, so strategies will
influences organizational structure. Nonetheless,
organizational structures do not influences competitive
strategies. What Miner (1982) and Hammond (1994
indicate seems to take place in this case. A debate whether
structure follows strategy or strategy follow structure has
been resolved. In its development, a consensus has been
made that both could be implemented (Hammond., 1994).
Findings by Covin and Slevin, (1989; Robertson and Chetty,
2000) explains that the choice of appropriate strategy will be
closely linked with the organizational structure, which will
influences the company‘s performance. Environment,
organizational structure, and strategic orientations have a
causal relationship with business performance. There is also
a relationship between environment and strategic
orientation, organizational structure and strategic orientation
which could improve performance.
Based on the data analysis, the findings are: (1) external
In this case, organizational structure does not significantly
environments (EE) have positive influences to competitive
influences the competitive strategies. The manufacturing
strategies (CS) (H1 supported), (2) internal environments
companies used as samples in this research do not have full
(IE) have positive influences to competitive strategies (CS)
organic organizational structures yet. In general, they still
(H1 supported), (3) organizational structure (OS) don‘t have
have mechanical organizational structures, for example,
positive influences to competitive strategies (CS) (H3
communication channel, very structured important
rejected), (4) competitive strategies (CS) have positive
operational and financial information access, limited
influences to strategic orientation (SO) (H4 supported), (5)
information access, uniformed managerial styles, decision
competitive strategies (CS) have positive influence to the
making responsibility of a formal manager, proven
business performance (BP) (H5 supported), (6) competitive
principles despite changing circumstances, employees are
strategies (CS) have positive influence to organizational
required to follow formal procedures, formal control
structure (OS) (H6 supported), (7) strategic orientation (SO)
through information system and strict control and complying
have influence to the business performance (BP) (H7
formal job descriptions. This condition should not happen
supported), (8) organizational structures (OS) have positive
considering the manufacturing company leaders in
influence to the business performance (BP) (H8 supported).
Yogyakarta and Central Java perceive that the external and
C. Discussion internal environments faced by the company are hostile.
This will influences the strategies implemented by the
In general, this research indicates findings that environment-
company. If so, there is a discrepancy in the implementation
strategy-performance (E-S-P) model can be accepted or well
of competitive strategies and organizational structure which
implemented in the manufacturing industries in Yogyakarta
may influences the company‘s performance. If nothing is
and Central Java. This supports the previous researches
done, this will predictably slow down the business
which have confirmed the truth of his paradigm (Lukas,
performance.
et.al., 2001; Badri, et al.,2000; Li, 1991; Luo, 1999). The
Therefore, in today‘s competitive era, the companies are
findings of this research indicate that in the framework of
recommended to emphasize on marketing activities as a
environment-strategy-performance (E-S-P) paradigm, this
development support of production process, superior quality
paradigm could be integrated by studying other variables
product creation with premium price, brand image building
apart from competitive strategies which play a role of
and focusing on continuous service, aggressively searching
P a g e |6 Vol. 10 Issue 5 (Ver 1.0) July 2010 Global Journal of Management and Business Research

for new market opportunities. Manufacturing companies in by appropriate design and organizational structure, and vice
Yogyakarta and Central Java need to highlight the loose cost versa, because both will influences the business
control system by focusing on the above standard product performance.
creation, flexible operational activities with strong inter-
V. CONCLUSION AND IMPLICATION OF THIS STUDY
functional coordination, and excellence in research and
development and high quality new products. A. Conclusion
This condition happens because the companies are expected
External and internal environments faced by manufacturing
to implement innovative competitive strategies. This may be
companies in Yogyakarta and Central Java are perceived
caused by the pressure of hostile external and internal
hostile, efficient competitive strategies, conservative
environments. The characteristics of the environment
condition are vulnerable industrial setting, tight competition strategic orientation, and mechanical organizational
intensity, tough and tight business climate, lack of structure. This perception will influences the main result of
the research such as; (1) external environments have
exploitable opportunities, full of risks, pressure and
positive influences to competitive strategies, (2) internal
domination. The company needs to be careful about
environments have positive influences to competitive
implementing that innovation strategy since costs need to be
strategies, (3) organizational structure don‘t have positive
taken into consideration. Loose cost control focusing on
above standard product creation, flexible operational influences to competitive strategies (CS), (4)
activities with strong inter-functional coordination, and strategic orientation have positive influences to competitive
strategies, (5) competitive strategies have positive influence
excellence in research and development and high quality
to the business performance, (6) competitive strategies have
new products will require relatively high costs. This should
positive influence to organizational structure, (7) strategic
be compensated by continuous performance improvement.
It should also be noted that along with the growth and orientation have influence to the business performance, (8)
growing organization due to the improving company organizational structures have positive influence to the
business performance.
performance, centralization or authority and power in the
The recommendations proposed by this research are; (1)
echelons of top management will also grow. There is
manufacturing companies in Yogyakarta and Central Java
distance between relevant information resources and
need to analyze and pay attention to the strategies
decision making. Also, the more decentralization in an
organization often produces improvement in some areas and concerning the aspects of marketing mix. Aspects of
in effectiveness. Decentralization is related with the more marketing mix include marketing activities conducted by the
company which cover; products and services, price
management efficiency, open feedback communication,
competition, distribution and promotion channels. Besides,
work satisfaction and more loyal employees. In some cases,
manufacturing companies in Yogyakarta and Central Java
organizational decentralization produces performance and
need to pay attention to the level of product innovation,
innovation improvement and creativity in organization, so
organizational performance will also improve, although this industrial growth and development, the toughness of
is not a guarantee. marketing environment of the main competition, impacts of
competition, various production methods and marketing
The study of organizational structures cannot be separated
tactics to different consumers When business faces tight
from specialization and formalization. Specialization can be
competition, the situation is complex and uncertain. To
measured in various ways, for example, the number of
respond this challenge, continuous innovations, based on the
divisions in an organization and the number of special
sections under each division, the number of different organizational knowledge, are required. The companies
positions and the number of different sub units in an which continuously innovate (act creative destruction) have
the competitive advantage based on knowledge. Accurate
organization, and the number of jobs and positions in an
and appropriate identification of company‘s resources also
organization. Specialization will boost performance because
functions as core competency to produce business
specialization enables every employee to have expertise in a
certain field so that they could maximally contribute to the performance, (2) competitive strategies are directed toward
goal. Despite its benefits, specialization has also its a position of profitability and competitive capability facing
the power determining the industrial competition. It should
drawbacks on the part of the employees regarding the
also be noted that the choice of appropriate strategies will be
mental health, work attitude, and the tendency to stay in an
closely linked with the managers‘ strategic orientation,
organization. Formalization usually indicates the work scope
which will influences the business performance, (3)
and regulation of employees through formal procedures,
rules and regulation. The bigger the influence of rules, structure is a good way to place people as part of an
regulation, and work obligations, the bigger the organization in relatively stable relationship, which
determines patterns of interaction, coordination and task-
formalization is. This formalization very often puts the
oriented behaviors. Some of the things which need to be
company at disadvantage because this will discourage
taken into consideration and to be further studied in
creative behaviors, innovations and adaptations. One of the
organizational structure of a company is the span of control,
advantages, however, is that the company becomes more
effective and efficient. This organizational structure will decentralization or relative centralization of the authority
have a close link with the business performance. Therefore, and power, level of formalization, degree of functional
specialization, (4) it should also be noted that experience,
the appropriate strategic implementation should be followed
Global Journal of Management and Business Research Vol. 10 Issue 5 (Ver 1.0) July 2010 Page|7

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