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Uncertainty is a major obstacle to decision making for small businesses. Young firms in particular
face uncertainties of business model, competitors, customers, and overall viability. Some
uncertainty is specific to a given firm, industry or region. More broadly, uncertainty in the
economic, political or technological environment will impact a range of small or young firms across
a wide range of industries.
What is the impact of high uncertainty on businesses both fledgling high-growth entrepreneurial
ventures as well as more traditional businesses? Optimistically, businesses lack the inflexible
bureaucracies and resource commitments that limit the organizational flexibility of large
incumbents. Economic turbulence may also provide entry opportunities for new businesses lacking
commitments to prior technologies or business models.
On the other hand, while they may be more nimble than their larger and older counterparts,
younger and smaller businesses also often lack the resources to shape the rules of competition, or
to win government intervention to do so. Even the most growth-oriented of new businesses may
have limited legitimacy at a time that buyers are fleeing to the safest (i.e., largest, most stable)
suppliers, while established small businesses may toil for decades on thin margins and limited cash
In either case, extreme uncertainty raises numerous threats to which the business must plan for,
address, and respond.
Managers in every industry have faced difficult challenges in the sense that their firms encounter
increasingly environmental uncertainty (Pagell and Krause, 1999; Castrogiovanni, 2002). Short
product life cycle, short product design cycle, rapid technological change, diverse range of
customers tastes, scare resources, and frequent entry by unexpected outsiders are a few factors
that influence firms external environments. In high uncertainty environments, organizational
decision may make mistakes simply because managers cannot determine or predict which
alternative will solve a problem (Daft, 2001; Schoemaker, 1993). In order to cope with
environmental uncertainty and to assist managers decision, many firms implement powerful
information systems to increase their information processing capacity, and their flexibility to adapt
to environmental changes (Watson and Fenner, 2000)
Uncertainty has been a central concept in the organization theory literature, particularly in theories
which seek to explain the nature of the relationship between organizations and their environments
(Dill, 1958; Duncan, 1972; Lawrence & Lorsch, 1967; Thompson, 1967) Uncertainty has been a
central concept in the organization theory literature, particularly in theories which seek to explain
the nature of the relationship between organizations and their environments (Dill, 1958; Duncan,
1972; Lawrence & Lorsch, 1967; Thompson, 1967). In his classic book Organizations in Action,
Thompson, in fact, asserted that uncertainty is the fundamental problem with which top-level
organizational administrators must cope (1967, p, 159). Organization theorists have made
attention particular attention on a variable which has come to be known as environmental
uncertainty or perceived environmental uncertainty.
Organization theory highlights that organizations must adjust to their environment if they have to
remain viable. One of the central issue in the procedure is managing with uncertainty. It should be
emphasized that environmental uncertainty and the dimension of the environment are defined here
in terms of perception of organization members research show that there is difference among
individual in their perception and tolerance for ambiguity or uncertainty
In the present analysis environment is thought of as the totally of physical and social factors that
are taken directly into consideration in the decision making behavior of individuals in the
organization. If the environment is defined in this way, there are then factors within the boundaries
of the organization or specific decision making units that must be considered as part of
environment. A differentiation is made, therefore, between the systems internal and external
Overall, the environment plays a strategic and crucial role by influencing organization design,
actions, and outcomes, particularly in virtual organizations Executives are often required to
redesign their
Organizations need to manage the uncertainties that are inherent in their environments. For
instance, intensity of competition in the financial and insurance services has led to the growing
numbers of consultants who offer personalized and immediate advice at their customers sites,
through the use of portable computers with access to their corporate databases. Recent empirical
studies have indeed found much part of their strategies to counter demand uncertainties and
competition in the global market.
Downey and Slocum (1975), in their review of the environmental uncertainty literature, noted that
the word uncertainty is so commonly used that "it is all too easy to assume that one knows what
he or she is talking about" when using the term (p. 562, emphasis added). Such an assumption may
cause researcher to pay insufficient attention to the conceptualization and operationalization of a
construct. One source of confusion in the environmental uncertainty literature is that the term
environmental uncertainty has been used both as a descriptor of the state of organizational
environment and as a descriptor of the state of a person who perceives himself/herself to be
lacking critical information about the environment. The former implies that it is possible to
characterize the environment in terms of how objectively uncertain they are; the latter implies that
environmental uncertainty is inherently "in the eye of the beholder and thus ought to be studied as
a perceptual phenomenon (Aldag & Storey, 1979; Huber OConnell, & Cummings, 1975; Starbuck,
1976), These two perspectives have yielded different definitions and operationalizations of the
term environmental uncertainty.
The three most common definitions cited by organization theorists are:
1. An inability to assign probabilities as to the likelihood of future events (Duncan, 1972;
Pennings, 1981; Pennings & Tripathi, 1978; Pfeffer & Salancik, 1978);
2. A lack of information about cause-effect relationships (Duncan, 1972; Lawrence & Lorsch,
1967); and/or
3. An inability to predict accurately what the outcomes of a decision might be (Downey &
Slocum, 1975; Duncan, 1972; Hickson, Hinings, Lee, Schneck, & Pennings, 1971; Schmidt &
Cummings, 1976)
Most of these definitions are adaptations of definitions of uncertainty offered by theorists in the
fields of psychology and economics (Garner, 1962; Luce & Raiffa, 1957; MacCrimmon, 1966)


One type of uncertainty which organizational administrators can experience is uncertainty about
the state of the environment. Administrators can experience state uncertainty when they perceive
the organizational environment, or a particular component of that environment, to be
unpredictable. Top-level managers might be uncertain about what actions relevant organization or
key organizational constituencies (i.e., suppliers, competitors, consumers, the government
shareholders, etc) might take, or they might be uncertain about the probability or nature of general
changes in state in the relevant environment (i.e.,, socio-cultural trends, demographic shifts, major
new developments in technology).
Uncertainty about the state of the environment means that one does not understand how
components of the environment might be changing. An inability to predict the future behavior of a
key competitor is a manifestation of state uncertainty as is an inability to predict whether Congress
will deregulate one's industry as well as uncertainty about whether a key labor union will call for a
nationwide strike.
A second and quite different type of uncertainty about the environment relates to an individuals
ability to predict t what the impact of environmental events or changes will be on his/her
organization. Effect uncertainty, thus, is defined as an inability to predict what the nature of the
impact of a future state of the environment or environmental change will be on the organization.

A third type of uncertainty is associated with attempts to understand what response options are
available to the organization and what the value or utility of each might be. Response uncertainty is
defined as a lack of knowledge of response choice (Conrath, 1967; Duncan, 1972; Taylor, 1984). ,
Response uncertainty is likely to be salient when there is a perceived need to act (Jackson, Schuler,
& Vredenburgh, in press) because a pending event or change is perceived to pose a threat or to
provide some unique opportunity to the organization.
While a firms external analysis often centers on customers and rivals, its growth, profit and other
measures of success may also depend on forces outside the industry. As Ginter and Duncan (1990:
91) note, success for many firms depend on how well they respond to macro social, economic,
technological, or political/regulatory changesthe external macro-environment. In less developed
countries, the formation and growth of new firms may depend less on small business support and
more on the health of the macroeconomic environment (Dawson, 1990).
Some forces in the macro-environment create less uncertainty than others. An example would be
changes in the macro-environment that are years or even decades in coming, as with the decline in
the social acceptability of smoking or the increasing proportion of elderly customers (Ginter and
Duncan, 1990). Other changes are more short term and thus introduce a greater degree of
unpredictability into entrepreneurial planning. Here we consider three types of uncertainty about
the general business environment: economic, political and technological uncertainty

Economic uncertainty (or macroeconomic volatility) relates to the functioning of financial markets,
economic growth, consumer confidence, exchange rates or inflation (Bourgeois, 1985; Milliken,
1987; DeSarbo et al 2005). For example, during a major recession, the risk of investing increases,
and both business- and consumer-oriented credit markets contract as borrowers are less able to
demonstrate ability to repay and lenders may be less willing to lend during periods of high
economic uncertainty.

The most extreme form of uncertainty is political risk, which Robock (1971) defines as the risk of
discontinuities in the business environment that result from political change discontinuities that
are difficult to anticipate and have a large potential impact on firm profits or other objectives.
Normally political risk focuses on affects on cross-border trade and investment, as when Busee &
Hefeker (2007) identified four dimensions that predicted FDI inflows for 83 developing countries.
However, political risk can more generally be used for the adverse impacts of political activity upon
business, even in its home country (Robock, 1971; Kobrin, 1979). Even without the risk of
discontinuous intervention, increased policy uncertainty leads to decreased private investment by
firms in their own countries as doubts about the future returns to investment discourage economic
risk-taking (Bittlingmayer, 1998; Brunetti and Weder, 1998). For example, periods of increasing
regulation and regulatory uncertainty demonstrate reduced levels of business investment
(Bittlingmayer, 2001).
Economic and political uncertainties are often related. For example, times of high economic
uncertainty can also lead to political uncertainty, when government officials pursue policies to
repair their own credibility and legitimacy; examples could be seen in many countries during the
recent recession. Thus, the two forms of uncertainty may be cumulative and interdependent, as
small businesses seek to cope with both the economic uncertainty and the under- (or over-)
reaction of political leaders in addressing those economic problems (cf. Fields, 2009).

It adds an additional level of exogenous uncertainty to a firm, industry or economy. Periods of
greater technological innovation will tend to have higher technological uncertainty (Audretsch,
2001). At the same time, technological uncertainty creates entrepreneurial opportunities, as some
firms will correctly accept (or reject) a new technology before others (McMullen & Shepherd,
2006). Such technological uncertainty may also contribute to economic uncertainty, until the
potential for a new technology is widely recognized (cf. Alvarez & Barney, 2005).

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