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Organization's External Environment PDF
(344 votes, average 3.17 out of 5)
Written by Ashim Gupta   
Sunday, 20 December 2009 04:43

Organization’s External Environment

The external organization comprises of all the entities that exist outside its boundary, but have significant influence on its growth and survival. An organization has little or no control over its environment but needs to constantly monitor and adapt to these external changes, a proactive or reactive response leads to significantly different outcome.

The Environmental Domain

The domain consists of all the entities of the environment that interacts with the organization. Although the domain can be large, it is important to focus on the ones that have the highest significance. The common external factors that influence the organization are discussed below.

  • Competition: It comprises of the related industries with similar products or services, their geographic locations and markets.
    • Related Industries: It is important to know all the competitors, their organizational size and skills pool, their competitive advantages, their marketing strategies, offshore development etc. 
    • Global context: Due to increasingly broad world economy, it is important to watch the competition across the oceans, competitive products launched from abroad, changing socio-political situations, and home grown entrepreneurs.
  • Customers: They are the end-users of the product and services, the most critical aspect of the environment.
    • Preference changes: Customers likes and dislikes changes rapidly, people live in a tight social system that create and encourage trends. It is important to anticipate changes in user’s product requirements, emerging technologies that can change how the products are used etc.
    • Demographical changes: These include the social, economical and cultural changes like population age, ethnicity, education level and economic class. Such changes affect the customer preference and the mass market trends. 
  • Resources: An organization depends upon availability of certain external resources for its operations and productivity. External Environment
    • Skilled Workers: These include undergraduate students, related university courses, training schools and labor market. The availability of adequately skilled employees at various levels in the organization can change dramatically over the period of time. Once the demand for certain skill drops, so does the supply, in a long run it adversely affect the organization since it becomes hard to obtain highly skilled new workers. Similarly, as the competition grows, they compete for the same skill set in the market creating a high temporary demand.
    • Raw Materials:  Every organization uses certain raw materials to manufacture its product or service, any disruption in its supply, changes in cost of materials etc can have an adverse effect.  The raw material definition includes sub parts that are contracted to be manufactured by others, projects that are send overseas for production, the leased space the organization uses or the transportation  of its goods.
    • Finance: It provides operational support; it includes savings or available cash, credit lines to fund new ventures, venture capitals, the stock markets and investors. It is particularly noteworthy in the organizations that operate on thin margins or new startups since they have little support to raise capitals.
  • Technology: It includes the science and technology required for the production, the technical tools that are used in the manufacturing or the technology of the product itself in case of high-tech industry. Internet, social network, advances in semiconductors and communication technologies have revolutionized how organizations operate in current era.
  •  Laws and Regulations: All organizations have to abide by the legal system, new laws and regulations are constantly added due to the political or social changes.  Compliance can result in additional cost, developing new technology, additional taxes or legal fees; one such example is lowered carbon emission requirements.

Environmental Uncertainty

The rate at which the external domain can possibly change defines the environmental uncertainty; put differently, it’s a measure of how many factors change during a single planning period. Not all factors impact the day to day operations and thus needs to be weighed differently. Higher level of uncertainty entails that organizational leaders have a complex environment to deal with, it test their visionary and decision making capability in absence of clear data.
A framework of environmental uncertainty can be formulated by determining the complexity and stability of the environment.

  • Complexity of Environment: It’s a measure of number of domain elements that influence the organization’s operation. Not all domain factors might have considerable impact, one company might have very few competitors with little market share while another might be threatened by new players.
  • Stability of Environment: It is the frequency at which the domain elements change and how predictable are the changes. Domain is considered to be stable if only few elements change in a predicable fashion. It is considered unstable if the domain elements are dynamic and shift abruptly, and it is hard to anticipate the changes.  Competitors marketing strategies or alliances, price wars, sudden change in political climate are some unpredictable factors that add to the domain’s instability.

Environmental Intelligence

Environmental intelligence gathering is a process of constantly scanning the environmental domain for changes. Its purpose is to detect the changes, gather vital information, perform methodical analysis and present its reports to the top executives in the organization.  There are two channels of obtaining environmental domain changes that are mentioned below.

  • External Linkage: Organizations are an open system and are tightly bounded to its external environment. Almost every functional unit has either direct or indirect linkage with the environment and it receives tips and information about the related changes. Sales & marketing can provide information about the competition’s new product, road-map and pricing, R&D about the emerging technologies, HR about skilled resources, laws and regulations. Similarly procurement dept can detect changes in suppliers and finance about availability of credit, economic outlook etc. Some organizations create an additional functional unit that acts as a bridge between other units, it systemically collects and compiles the competitive information that is used by top executives in strategic planning and decision making.
  • External Consultants: Organizations can also use specialized external services in field of competitive intelligence and strategic planning. These services utilize various tools like survey & questionnaires, systemic scanning of public information and the web and use various statistical techniques to analyze the collected data. These consultants work with the internal functional units as well the external environment to obtain their information, thus can potentially provide unbiased recommendations which are sometimes hard to obtain internally.

Adapting to External Environment

In order to survive and prosper, the organization has to adapt itself to the ecological system that surrounds itself.  It is important to utilize the environmental intelligence to determine the uncertainty and take appropriate actions for the well being of the organization.

  • Forecasting and Planning:  Environmental uncertainty should be used to predict the future course of the environment and plan appropriately to reduce its adverse impact. A planned organization is better prepared against the unstable environment and can respond quickly and coherently.
  • Organization Design or Reorganization: The internal design of the organization is directly influenced by the stability and uncertainty of the external environment (also see “Organization Design”). The two structural dimensions,hierarchical vs. horizontal are both dependent upon the environmental instability, when the environment is stable, hierarchical structure provides essential control and efficiency.  Since not every functional area will have similar uncertainty, organizations need to adjust the extent to which they need coordination vs. control in internal structure of each unit.
  • Reduce Resource Dependence:  As mentioned earlier, an organization depends upon external resources, but it can find ways to control some aspect of it. One method is to forge inter-organizational alliances where it shares the scare resource, collaborate with one another to control cost and minimize risk while giving up some of its autonomy. Inter-organizational linkage can be in form of acquisition of similar organization, contracts and joint ventures with competition. Another approach is to keep extra resources at an additional cost, having more than necessary workers and raw materials provides a cushioning effect to slight changes and thereby minimizes risk. 

Controlling the External Environment

  • Shifting Core Competencies:  An Organization can change its core business to an emerging product and thereby lead the change in the domain for other competitors. By leading a change, it creates a new customer base, monopolizes the market and keeps the competitors out. However such drastic step can only be initiated by a visionary leader who has the support of all the stakeholders, board members and the investors.
  • Advertisements:  These are effective means of influencing the customer taste and opinion; and it provides an edge over the competition.
  • Political Lobbying: Political lobbying and activities are ways influencing the government policies and regulations in favor of the organization or sometimes against the competitors. Lobbying for “Green” legislation is a good strategic advantage over competition for firms that had anticipated it and have the technology to deliver it.
Comments (76)
  • Peter Bamani
    what are the factors affecting and influencing public administration
  • Peter Bamani  - re:
    Anonymous wrote:
    Could you please assits mi external environment that affects and also affected
    by an organisation. 8)
  • Anonymous
    :lol: i do like this i will compite my assignment
  • Anonymous  - miss
    hi plz could u help me the question follow. using the PESTLE anaysis, analyse
    the major extternal factor which infuence the availability of suitable employees
    for yor organisation?
  • jmkyule07@yahoo.com
    can some one help me to answer this:
    what is the significance of the external environment to private high schools
  • JACOB
    external factors that influences service redesign
  • Largon Lindburg
    I need help with this question. what is meant by an organization’s external and
    internal environments and how the external and internal environments of an
    organization can influence or impact both long term objectives and business
    strategies.
  • Rotis  - management
    can anyone help me...i'm trying to answer this question..."Discuss the
    internal and external of an organization using relevant examples." thanks a
    lot
  • Tshepiso
    Please help me in discuss the elements listed below in considering environmental
    impacts on the organisation and the important kinds of information to consider
    in the process on planning and strategy formulation.

    1. Demographic information

    2. Geographic information

    3. General census results

    4. competitive analysis

    5. scenario analyses

    6. historical trends
  • Anonymous
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  • Anonymous  - re: re:
    Anonymous wrote:
    [quote=vinie]Discuss the significant elements comprising the external
    environment of business

    Explain the privatization move of public sector enterprises in recent years.
    Also explain
    the measures to be followed for survival of public sector enterprises in
    India.
    plz hlp me tofind out the answers of this questions
    [/quote]
    vinie wrote:
    Discuss the significant elements comprising the external environment of business

    Explain the privatization move of public sector enterprises in recent years.
    Also explain
    the measures to be followed for survival of public sector enterprises in
    India.
    plz hlp me tofind out the answers of this questions
  • Afia Nsoroma
    thanx so much. this is extremely helpful :D
  • Alex Wong  - Emergenece Question
    Do you think external environment determine a organization to be success or
    failure? Can you further explain your answer? :( :(
  • Alex  - Help
    How to analysis external environment of an organization? and what approaches/
    tools and techniques can be used to do the analysis?
  • Kallah  - Changing organisation domain
    is changing the organisation's domain a feasible strategy for coping with a
    threatening environment? can you think of an organisation in the recent news
    that has changed its domain? Explain

    Needs a reply as soon as possible? Any help
  • dolly
    :D this has just completed my assignment.keep it up
  • nimeri john  - im studying business management so this helps me m
    could u pliz send me more notes in my e mail.
  • Anonymous
    thank you, this information is very nice :lol:
  • tracy gumbira  - external factor
    Hi
    Thankyou so much for the detailed information that you have helped me so much
    to complete my assignment.So could you please send it to my email address.

    ta
    Tracy
  • Anonymous
    Could you please assits mi external environment that affects and also affected
    by an organisation. 8)
  • aboluwade moa  - assignment
    I love to study and use it for my assignment. thanks.
  • ben connelly  - nebosh environmental management
    outline the reasons why an organisation needs to manage its effects on the
    environment.





    please please please help me guys/gals :D :) 8) :lol: :shock:
  • agrey komba  - eternal enviroment in infrluencing organisation cu
    am aprecate efectively fopr what material presented reach enough but i wanna
    know how external organisation influence organisation in responding on it?
  • nonhlanhla  - external environment
    what has happened in the past three years in the external environment that could
    affect our work as an organisation?
  • Shiviti Rich 4rm mavalani vill
    HEY GUYS................!
  • Jackson  - Trly it helps
    :trly it helps to get some information
  • Shiviti Rich 4rm mavalani vill  - Economic environment
    I hv done my Assignment,Thanx
  • Anonymous  - re:
    vinie wrote:
    Discuss the significant elements comprising the external environment of
    business



    Explain the privatization move of public sector enterprises in recent years.
    Also explain

    the measures to be followed for survival of public sector enterprises in
    India.

    plz hlp me tofind out the answers of this questions
  • vinie
    Discuss the significant elements comprising the external environment of business

    Explain the privatization move of public sector enterprises in recent years.
    Also explain
    the measures to be followed for survival of public sector enterprises in
    India.
    plz hlp me tofind out the answers of this questions
  • teslim ajagunjeun  - re: External Environmental factors of Business
    joyuchechi wrote:
    Pleas i need help on this, an Assignment was giving to us in school about
    external environmental factor of business, that we should download a copy of it
    and summarize, so i need help someone should help me pls.

    Thanks

    Joy.

    Joy if Ƴöů D̶̲̥̅̊☺̣̣̥̇ŋ't Α̲̅я̩̥̊ε̲̣̣̣̥ Ƴöů yabatech studen because I Ђåvε̲
    same tin wit Ƴöů
  • WATSON  - THE ESSENCE OF BUSINESS IS OUTSIDE IT'SELF
    how does the economic environment affect business?
  • Kc  - Flexible Leadership
    I am trying to do a power point on applying Yulk and Lepsinger guidelines for
    monitoring the external environment
  • joyuchechi  - External Environmental factors of Business
    Pleas i need help on this, an Assignment was giving to us in school about
    external environmental factor of business, that we should download a copy of it
    and summarize, so i need help someone should help me pls.

    Thanks

    Joy.
  • zado
    give me same of the books or chapters

    the effectof dedecision making in organizational development
  • Anonymous
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  • bigie k moyo  - VERY HELPFUL
    I have been so much assisted.
  • shana
    I DONE MY ASSIGNMENT, THANKS ALOT :)
  • Roselynette
    I am glad it is part of my assignment,thanks alot
  • Anonymous  - thank u.
    thank u very much for ur information. its really helpful to gather right info
    for assignments. :D :) :wink: :wink: :lol:
  • nthane sikhumbuzo
    what are the key elment of the environment
  • pris  - Change Mangement
    So what contemporary change management theories would you use to change
    organizational culture and/or diversity issues? This is very critical and I need
    to asap. THX
  • intisar awad
    thanks for these valuable information about External Environment.please send
    this topic in my email,(intsar.awad@yahoo.com)
  • bhuvaneswari  - OD
    Its very help full me to class
  • joo moe  - thnz
    good work thnz alot 4 dis info :D
  • Njow
    this is wonderful..especially for a students like me
  • emmagabriel
    please help me to print
  • Josephine W. Kagoi
    importance of understanding the external environment
  • EDDY
    TANX FOR THE INFO N LOVE UUUUUU
  • MARY GRACE  - thanks
    thanks for the information now I'm able to report my topic about external
    environment :)God bless you
  • Anonymous  - re: re: help
    fidelis wrote:
    am taking a project on external and organizational productivity,and atleast I
    got an idea how to go about it
  • fidelis
    :( My problem now is how to write a questionare on the project.What are the most
    important questions during the research on the effects of external environment
    of an organization?
  • mos
    hello
    this my problem too
    I become very glad if you send your result for me
    my email: bagherm@ut.ac.ir
    thanks a lot
  • fidelis  - re: help
    am taking a project on external and organizational productivity,and atleast I
    got an idea how to go about it
  • Diane  - help
    What are the effects on Organisational design when environmental factors change.
    With regard to tasks/workforce/responsibilities/general operatons?

  • Ashim Gupta  - external environment influences the contextual dim
    The external environment directly influences the context in which the
    organization has to operate. (refer to http://www.practical-management.com/Organizatio...) While strategies get influenced by competitors, the availability of workforce,
    changes in demographics might influence how much the horizontal/hierarchical the
    structure might be or what kind of culture is required (genX or Millennial)
  • gift
    can you tell me the importance of understanding the external environments
  • Ashim Gupta  - Importance of external environment
    Changes in external environment affects the lifecycle, it is perhaps a
    significant cause of the demise of an organization.Thus any organization has to
    cope with it by devising new strategies and aligning it's structure & culture
    appropiately.
  • Anonymous
    may you give a concise explanation on how external organization affects the
    organizational structure and the performace of the entire school? and what
    school model as social system fits with it?
  • Ashim Gupta  - 10+2 schools & external environment
    In my mind, the most influencial environmental factors that affect a schools
    structure are a) Demograhical changes - social & economic distribution of the
    schools students b) Talented Teachers, their availabity & willingness c)
    Financial resources. One might note that all are in some way interrelated, thus
    one might observe that a high performing school is in a well-off neighbourhood
    with good teachers and more funding.
  • shaik  - it startergy
    IT strategy Managers can manage complexity by means of timing, learning and
    flexibility how is this related
  • Ashim Gupta  - IT strategy & external environment
    An IT organization can be a functional part of an organization (e.g microsoft)
    or IT can be the primary business (e.g netapps). Even when IT is internal, it
    needs to align to the changing functional needs of the business (size of
    infrastructure etc), it can be imapacted due to better/cheaper outsourced model,
    lack of experienced employees for better customer service etc. When IT is
    primary function, then it needs to maintain a competitive advantage defined by
    it's technology, cost and support.
  • fareed  - help
    The question I need help with is that evaluate the appropriateness of business
    information used to make strategic decisions. Analyse how changes in the
    external environment will impact on the company's functional areas.



    if anybody could help it would be good.
  • student

    Could you please assist in distinguishing between
    the following organizational structures:

    Bureaucratic Vs vertical
    Horizontal Vs flat structures
  • shivangi kashyap  - need more information...
    I agree wid your point but i want to know that "how it brings a change
    in the organization culture?"
  • Carl  - Help
    Good stuff, doing a report on external and internal environments and its effects
    on planing and controlling, finding it hard to find some academic journals,
    would anyone know of some good ones?
  • bryan crisostomo  - help
    :D im taking up business management, tnx! it helps me a lot! more power!
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