CHAPTER 3
UNDERSTANDING
INTERNAL & EXTERNAL
ENVIRONMENTS
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EXTERNAL ENVIRONMENT
‘Major forces outside the
organisation with potential to
influence significantly the
likely success of a product or
service.’
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EXTERNAL ENVIRONMENT
External environment is made up of:
• The mega-environment
The broad conditions and trends in societies in
which an organisation operates.
• The task environment
Specific outside elements with which an
organisation interfaces in the course of
conducting its business.
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THE MEGA-ENVIRONMENT
Technological
element
Economic
element
The
organisation
International
element
Legal-political
element
Sociocultural
element
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Five major elements:
1) Technological element:
Current state of knowledge regarding production of products &
services
2) Economic element:
Systems of producing, distributing & consuming wealth
Consumers purchasing power, unemployment rate, interest rates
mergers and acquisition. Capitalist and socialist economy
3) Legal-political element:
Legal & governmental systems within which an organisation must
function
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4) Sociocultural element:
Attitudes, values, norms, beliefs, behaviours &
associated demographic trends characteristic of a
given geographic area.
Delay marriages, single parents, growing work
force diversity
5) International element:
Developments in countries outside of an
organisation’s home country with potential to
influence the organisation.
Currency fluctuations, free trade
agreements(NAFTA)
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Example
• Economic element- Soaring jet price is one of the
reason threatening the survival of Japan Airlines
Company. Fuel prices increased 45% to $32 a
barrel on the Singapore exchange, causing Japan
Airline’s fuel bills to increase $90 million.
• Legal-political element- In India where cow is
regarded as a sacred animal, McDonald’s has
opened its first beef-free restaurants where its
burgers are made of 100% lamb.
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THE TASK ENVIRONMENT
Competitors
Government &
regulators
THE
ORGANISATION
The
employment
market Public pressure
Customers/
clients
Suppliers
groups
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Five elements:
1) Customers and clients:
Individuals and organisations purchasing products/services
people who buy the goods. Usually, there are several
groups of customers.
IMPORTANCE OF CUSTOMER SERVICE
INTERNET threat
2) Competitors:
Other organisations offering (or with a high potential to offer)
rival products/services
Rivalry between competitors is usually the most
serious force facing managers.
In Telecom industry, rivalry among the competing firms is
very high i.e. Warid, Telenor, Jazz etc.
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3) Suppliers:
Organisations and individuals supplying resources an
organisation needs to conduct its operations
Managers need to secure reliable input sources
Suppliers provide raw materials, components, and even labor.
Cooperation key element to save money, maintain quality and
time
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4) Labour supply:
Individuals potentially employable by an organisation.
Every organization needs a supply of trained personnel
5) Government agencies:
Agencies providing services and monitoring compliance with
laws and regulations at local, state or regional and national
levels
Tax, consumer affairs, police
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Characteristics of the Environment:
1) Uncertainty:
Condition in which future environmental circumstances affecting an
organisation cannot be accurately assessed and predicted.
More uncertain-more time and effort spent by the managers.
2) Complexity:
Number of elements in an organisation’s environment(task) and
their degree of similarity
3) Dynamism:
Rate and predictability of change in the elements of an
organisation’s environment
4) Manificence:
Extent to which the environment can support sustained
growth and stability
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MANAGING THE ENVIRONMENT
Three approaches to managing the environment:
• Adaptation:
Involves changing internal operations & activities to make
the organisation and its environment more compatible
• Favourability influence:
Involves trying to alter environmental elements to make
them more compatible with the organisation’s needs
• Domain shifting:
Changing product/service mix to create favourable interface
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ADAPTATION
• Buffering:
Stockpiling either inputs into, or outputs from, a production
or service process to cope with environmental fluctuations
• Smoothing:
Taking actions aimed at reducing the impact of fluctuations,
given the market
• Forecasting:
Predicting changing conditions & future events that
significantly affect an organisation’s business
• Rationing:
Providing limited access to a product or service in high
demand
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FAVOURABILITY INFLUENCE
•
•
•
•
•
•
•
•
Advertising & public relations
Boundary spanning
Recruiting
Negotiating contracts
Co-opting
Strategic alliances
Trade associations
Political activity
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Example
• Advertising- Olper’s launch was, perhaps one of
the most aggressive as far as processed liquid
milk is concerned, with TVCs, print ads, radio
commercials, billboards etc. Due to this aggressive
marketing campaign, the competition seems to be
getting tougher. This can be gauged from the fact
that Nestle re-launched its product packaging
and marketing campaign just before Olper’s
launch. One can also see a far greater number of
milk advertising billboards in Multan city than seen
earlier like of Nirala, Good Milk and Nestle.
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Example
• Strategic alliance (joint venture)- The US fast
food giant McDonald’s entered the Indian market
by investing in two 50:50 joint ventures with
individual entrepreneurs in Bombay and Delhi,
India who will start operations with one outlet in
each city.
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DOMAIN SHIFTS
• Move out of a current product,
service or geographic area into a
more favourable domain
• Expand current domains through
diversification or expansion of
products/services offered
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Example
• Domain shifting- Harley Davidson Inc. has used
both domain shifts and favorability influence
approaches in order to deal with environmental
threats.
1. Domain shifts included expanding into other areas,
including motor homes, defense and commercial
contracts.
2. Efforts to influence the favorability of the
environment included convincing the federal
government to impose tariffs on foreign
competitors, advertising and public relations.
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INTERNAL ENVIRONMENT
Nature of organisational culture:
‘A system of shared values, assumptions, beliefs and
norms uniting organisational members’ (Smircich
1983; Kilman et al. 1986).
• ‘The way we do things around here.’
• The ‘glue’ binding the disparate parts (or the oil that
keeps them moving).
• The interpretive part of organisational behaviour: it
explains, gives direction, sustains energy,
commitment, and cohesion.
•
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Example
• Organizational culture- During top management
visits to various offices of Enterprise Rent-a-Car,
the executives, including CEO Andy Taylor, have
been known to help assist with daily activities
when the other staff members are busy. The
executives have been known to help with
transactions and even wash and vacuum cars.
Such activities help boost morale within the
company, as well as help illustrate the concept of a
team effort.
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MANIFESTATIONS OF CULTURE
• Symbols
Objects, acts, events or qualities serving as a vehicle for
conveying meaning
• Stories
Narratives based on true events, which may be embellished
to highlight intended value
• Rites
Relatively elaborate, dramatic, planned sets of activities
intended to convey cultural values to participants and,
usually, an audience
• Ceremonials
Systems of rites performed in conjunction with a single
occasion or event
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PROMOTING INNOVATION
• Strategic
Focused on identifying opportunities
• Committed to seizing opportunities
Willing to make major, fast changes
• Commitment of resources
Many stages with risk assessed for each stage
• Control of resources
Rental or outsourcing of resources for flexibility
• Management structure
Few levels, with informal communication
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CHANGING ORGANISATIONAL
CULTURE
An approach to changing culture:
• Surfacing actual norms
• Articulating new directions
• Establishing new norms
• Identifying culture gaps
• Closing culture gaps
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LEADERSHIP &CULTURAL
CHANGE
• Crisis identification
• Communication of a new vision
• Motivation of key staff
to lead cultural change by implementing
the new vision and its corresponding
strategy
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