Defining Uncertainty: The Implications for Strategic Management

By Gibbons, Patrick T.; Chung, Lai Hong | IBAR, January 1, 1995 | Go to article overview

Defining Uncertainty: The Implications for Strategic Management


Gibbons, Patrick T., Chung, Lai Hong, IBAR


Introduction

The uncertainty construct dominates the administrative science literature and the management of uncertainty has been identified as the primary task facing managers (Thompson, 1967; Weick, 1969). Uncertainty arises from both the ambiguous and complex causal structures underlying organisations' internal operations, surrounding environments and the nexus of relationships between organisations and the environment (March and Olsen, 1976; Collis, 1992). Some theorists have advocated that managers reduce, absorb or avoid uncertainty (Cyert and March, 1963; Thompson, 1967) while others have proposed that "uncertainty creation" can provide strategic benefits to the organisation by confounding competitors (Jauch and Kraft, 1986). As Gerloff, Muir and Bodensteiner (1991) note, there are two categories of uncertainty research: the contingency and perceptual approaches. The former are concerned with "fitting" the organisation's architecture with the exigencies of the external environment. For instance, Lawrence and Lorsch (1967) related differing levels of environmental uncertainty with differing requirements for differentiation and integration. The information-processing view of organisational design (Galbraith, 1973) explicitly related environmental uncertainty as imposing extensive information processing demands on the organisation.

On the other hand, the perceptual view of uncertainty is more process oriented, and seeks to establish relations between top management's perceptions of environmental uncertainty and strategy, structure, learning and performance (Gerloff, et. al., 1991). For example, Duncan (1972) addressed managers' own meanings of uncertainty and concluded that managers felt uncertain when (i) there was a lack of information regarding environmental factors in the decision making situation, (ii) they did not know the outcomes in terms of how much the company would lose if the decision was incorrect and (iii) they lacked confidence in the assignment of probabilities to outcomes. Bourgeois (1980) has argued that perceived environmental uncertainty is "more relevant, conceptually and perhaps empirically, to the study of strategy making than to the study of an organization's external environment" (1980: 25).

While many would agree that uncertainty is a basic feature of the business environment(Wack, 1985), and that organisational survival is partially explained by the ability to cope with uncertainty (Pfeffer and Salancik, 1978), it has been pointed out that "research has yielded inconsistent and often difficult to interpret results" (Milliken, 1987: 133). Thus, improved clarification in conceptualisation should benefit research in the area. Further, improved explication of the uncertainty concept should help top management teams to design planning systems and organisations with improved "absorption" and knowledge-creating capabilities (Hrebiniak and Joyce, 1986; Lyles and Schwenk, 1992; March and Simon, 1958).

In an important effort at providing clarification, Milliken (1987) hypothesized that organisational administrators face three types of perceptual uncertainty, namely: state, effect and response uncertainties. Moreover, she identified specific implications for strategic planning activities across each of these conditions of uncertainty. This paper supplements her conceptualisation by integrating it with another trichotomy of perceptual uncertainty developed by Dermer (1977). Further, this paper seeks to differentiate between the types or components of uncertainty, which both Milliken and Dermer identified, and the extent of uncertainty about a phenomenon. This is an important distinction, since uncertainty can be characterised as the absence of information about an event (Arrow, 1974). Synthesizing the types of uncertainty with the extent of uncertainty provides us with conceptual tools to decompose this absence of information into two categories, namely, what is not known, and the extensiveness of that ignorance. …

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