Environmental Dynamism and Firm Performance

Environmental dynamism is the rate at which the consumers’ preferences and organizational products change over time, devoid of patterns as well as regularities that is unpredictably. It can also be defined as the characteristic of the entrepreneur by which he must reflect the evolution on consumers´ preferences and organizational products over time. Keeping the context of dynamic changes in the environment in mind, the trend since the Fourth Industrial Revolution has been that firms are keen and show great interest in innovation as a means of responding to environmental changes effectively for their sustainable competitive advantage. Organizations are naturally, if not mandatorily, required to create and adopt some new idea or enhance an existing idea to sustain their development or growth under the dynamic business environment. Keeping this in mind, several business scholars have been actively conducting research on the impact of environmental dynamism on firms’ innovation or innovation performance.

Innovation can be defined as an interactive process of generating new products, knowledge, and technologies by reusing capabilities and knowledge within and without a firm. This kind of innovation has the potential to play a significant role in helping firms to achieve sustainable growth in response to their ever-changing environment. On top of that, innovation performance refers to the end result of innovation, and it may appear in the form of the development of new products, getting new market opportunities, and absorbing competitive advantage through innovation activities. In simpler terms, innovation performance typically includes patents, product development and launches, and a stellar rise in sales, profits, or market shares due to said product launches.

It is observed that firms usually are faced with the following three decision-making issues with regards to coping with their external environment:

1. An entrepreneurial issue—decisions on specific product and market related scope.
2. An engineering issue—decisions on a technology or method for producing and distributing products.
3. An administrative issue—decisions on approaches to coordinate and implement strategies.

Firms can employ different strategies based on how sensitively and on priority they wish to respond to their external environment with respect to the above decision-making issues. One such way to deal with this is the concept of strategic prospecting. This refers to the firms’ strategic orientation towards sensitively exploring and responding to the preliminary signals of environmental changes by seeking new products, markets, and technologies in relation to the decision-making issues mentioned above. This means that firms that have a higher level of strategic prospecting will be more willing to proactively explore and respond to the initial signals of market needs and opportunities and expand aggressively into new products and markets. The industrial organization theory in strategic management argues, based on the traditional structure–conduct–performance paradigm, that the industry structure or environment affects firms’ strategic behavior, which in turn influences their economic performance. The theory proposes that firms develop and execute a strategy in line with their industrial environment, and the strategy has an influence on their economic performance. As such, the industrial organization theory suggest strategy as a mechanism itself (in the order environment > strategy > performance) that connects the external environment to performance. From this viewpoint, it is believed that strategic prospecting can serve as a catalyst or a mediator (environmental dynamism > strategic prospecting > innovation performance) of the relationship between environmental dynamism and innovation performance.

With regards to this, strategic prospecting is hoped to have a positive and good effect on firms’ innovation performance. As firms pursue a higher level of strategic prospecting, it is important to become more responsive to environmental changes by offering new products, markets, and technologies more proactively. Thus, firms that have a higher level of strategic prospecting have to focus more on the innovation process of developing new products, markets, and technologies, which they can use as a medium to eventually achieve enhanced innovation performance. Taking the example of Apple’s high level of strategic prospecting, they aggressively pursue innovation. They do it by making huge investments, which results in achieving a higher level of innovation performance. In the same vein, previous studies have shown that firms that adopt the prospector strategy tend to produce improved innovation and innovation performance. In summary, under a dynamic environment, firms are likely to pursue higher levels of strategic prospecting as a means of responding to environmental changes effectively, through which they are likely to eventually a generate a higher level of innovation performance by enhancing the innovation process of developing new products, markets, and technologies.