Introduction to the external environment of a company
The environment of a company is made up of constantly changing factors, both external and internal - that affect the operation of the organization. If a new competitor appears on the market, the business environment is affected. If key customers take their business elsewhere, managers feel the impact. And if technological advances date back to an organization's current methods of doing business, once again, the management environment has to adapt. The external environment of an organization are those factors external to the company that affect the ability of the company to function. Some external elements can be manipulated by the marketing of the company, while others require the organization to make adjustments,Monitor the core components of your company's external environment and keep a close watch at all times.
Although companies cannot always control their environments, they need to be aware of the changes that occur, because the changes ultimately affect their daily decisions and actions. For example, in the airline sector, deregulation opened the market to new airlines, forcing existing airlines to be more competitive. Managers of existing airlines could not afford to ignore cheaper air fares and the resulting increase in service. Companies not only had to identify the new challenge, they also had to act quickly and efficiently to stay competitive.
Adaptation to environments
The role of a manager is to monitor and shape internal and external environments and to anticipate and react quickly to changes.
Managers can monitor environments through boundary extension, a process of collecting information on developments that could affect the future of the organization. Administrators can access information through a variety of sources: customer and supplier feedback; professional, commercial and government publications; industry associations; and personal contacts.
Managers can also actively work to influence their external environments through lobbying, voting, and using the media to influence public opinion.
- An organization that regularly affects and is affected by various constantly changing forces can be described as a natural force Socio-cultural force Open system Closed system
Of the following, what is a directly interactive force in an organization's external environment?
- Technological forces Leadership Economic forces Clients
Indirect interactive forces in the external environment of an organization
- Sociocultural forces Competitive forces Legal / political forces Technological forces
Sources spanning borders include all of the following, except:
- Clients Competitors Government Statistics Key Values Clients
Your clients are some of the external elements that you can try to influence, through the marketing and strategic release of corporate information. But ultimately, your relationship with your customers is based on finding ways to influence them to buy your products. Market research is used to determine the effectiveness of your marketing messages, and to decide what changes can be made to future marketing programs to improve sales.
government
Government regulations on product development, packaging and shipping play a significant role in the cost of doing business and its ability to expand into new markets. If the government establishes new regulations on how you must package your product for shipping, that may increase your unit costs and affect your profit margins. International laws create the processes that your company must follow to get your product in foreign markets.
Economy
As with most elements of your organization's external environment, your business must be efficient in monitoring the economy and learning to react to it, rather than trying to manipulate it. Economic factors affect the way you market products, the amount of money you can spend on business growth, and the type of target markets you will pursue.
Competition
Your competition has a significant effect on how you do business and how you run your target market. You can choose to find markets in which the competition is not active, or you can decide to take the competition directly in the same target market. The success and failure of your various competitors also determine a part of your marketing planning, too. For example, if a long-term competitor in a particular market suddenly decides to quit due to financial losses, then you will have to adjust your planning to take advantage of the situation.
Public opinion
Any type of company scandal can be detrimental to the image of your organization. Your organization's public perception can hurt sales is negative, or you can increase sales with positive company news. Your company can influence public opinion by using public relations professionals to release strategic information, but it is also important to monitor public opinion to try to defuse potential problems before they start to spread.
As previously mentioned, all the external factors that can affect an organization make up the external environment, but also the external environment can be divided into two parts:
Directly interactive: This environment has an immediate and first-hand impact on the organization. A new competitor entering the market is an example.
Indirectly interactive: This environment has a more distant and secondary effect on the organization. New legislation taking effect can have a big impact. For example, complying with the Americans with Disabilities Act requires employers to update their facilities to accommodate people with disabilities.
Directly interactive forces
Directly interactive forces include owners, customers, suppliers, competitors, employees, and employee unions. Management has a responsibility to each of these groups. Here are a few examples:
Owners expect managers to look out for their interests and provide a return on investment.
Customers demand satisfaction with the products and services they buy and use.
Suppliers require careful communication, payment, and a strong working relationship to provide the necessary resources.
Competitors present challenges as they compete for customers in a market with similar products or services.
Employees and employee unions provide both for people to do the jobs and representing workforce concerns to management.
Indirectly interactive forces
The second type of external environment is indirectly interactive forces. These forces include sociocultural, political and legal, technological, economic and global influences. Indirectly interactive forces can affect one organization more than another simply because of the nature of a particular business. For example, a company that relies heavily on technology will be more affected by software updates than a company that uses a single computer. Although something has been removed, indirect forces are still important to the interactive nature of an organization.
The sociocultural dimension is especially important because it determines the goods, services and standards that society values. Sociocultural strength includes the demographics and values of a particular customer base.
Demography is a measure of the various characteristics of the people and social groups that make up a society. Age, gender, and income are examples of commonly used demographic characteristics.
Values refer to certain beliefs that people have about different forms of behavior or products. Changes in how a society values an item or behavior can greatly affect a business. (An example is all the fashions that have come and gone).
The political and legal dimensions of the external environment include regulatory parameters within which an organization must operate. Political parties create or influence laws, and business owners must respect these laws. Tax policies, business regulations, and minimum wage legislation are just a few examples of political and legal issues that can affect the functioning of an organization.
The technological dimension of the external environment affects the scientific processes used to change inputs (resources, labor, money) to products (goods and services). The success of many organizations depends on how well they identify and respond to external technological changes.
For example, one of the most significant technological dimensions of the last decades has been the increasing availability and affordability of management information systems (also known as MIS). Through these systems, administrators have access to information that can improve the way they operate and manage their businesses.
The economic dimension reflects global financial conditions. Some economic conditions of special interest to organizations include interest rates, inflation, unemployment rates, gross national product, and the value of the US dollar against other currencies.
A favorable economic climate generally represents opportunities for growth in many industries, such as sales of clothing, jewelry, and new cars. However, some companies traditionally benefit from poor economic conditions. The alcoholic beverage industry, for example, traditionally does well in times of economic downturn.
The global dimension of the environment refers to factors in other countries that affect organizations in the United States. Although the basic functions of planning, organization, staffing, leadership and control management are the same, whether a company operates nationally or internationally, managers face difficulties and risks on an international scale. Whether it's unfamiliarity with the language or customs or a problem within the country itself (think mad cow disease), managers encounter global risks that they probably wouldn't have encountered had they stayed on their own shores.
How external factors drive organizational change
Managers must recognize and respond to all the factors that affect their organizations. It describes how the internal and external environments of an organization change in the company.
Navigating change in organizations
Sailing in today's chaotic business environments is like trying to steer a small ship back to shore while stuck in the center of a hurricane. There are many forces at work that a person will have to respond to in order to make it safe to return to port. Like this little ship, today's organizations and their managers are faced with a significant number of factors that require an immediate response, often in the form of organizational change. The forces driving this change in business are known as the internal and external environments.
Environmental Scan and Change
For managers to react to the forces of internal and external environments, they rely on environmental scanning. Environmental scanning refers to monitoring the organization's internal and external environments for early signs that a change may be necessary, to accommodate potential opportunities or threats, and to make adjustments to allow the company's strengths to combat its weaknesses. A common type of environmental analysis is the SWOT analysis, which specifically analyzes the strengths, weaknesses, opportunities and threats of internal and external environments. A manager will begin to analyze the internal environment by examining inefficiencies within the organization, and then look outside the external environment and for things that occur regardless of the organization.Environmental scans allow managers to use the knowledge gained during the scanning process to decide what strategic steps or changes the organization needs to take to create or maintain a competitive advantage.
Analysis of the external environment
The SWOT analysis framework has gained wide acceptance due to its simplicity and power in strategy development. Like any planning tool, a SWOT analysis is as good as the information it contains. Research and accurate data are vital to identify key problems in an organization's environment.
Evaluate your market:
- What is happening externally and internally that will affect our company? Who are our customers? What are the strengths and weaknesses of each competitor? (Think competitive advantage) What are the driving forces behind sales trends? What are the important and potentially important markets? What is happening in the world that may affect our company? What does it take to succeed? in this market? (List the strengths that all companies need to successfully compete in this market.)
Evaluate your company:
- What do we do best? What are our company's resources - assets, intellectual property and people? What are our company's capabilities (functions)?
Evaluate your competence:
- How are we different from the competition? What are the general market conditions of our business? What are the needs for our products and services? What are the market technology opportunities for the client? What are the problems and complaints? of the customer with current products and services in the industry? What "if only…" claims does a customer make?
Opportunity
Opportunity is an area of "need" in which a company can perform profitably.
Threat
A challenge posed by an unfavorable trend or development that would lead (in the absence of defensive marketing action) to deterioration in profits / sales.
Evaluation
It is necessary to complete an evaluation to draw conclusions about how opportunities and threats can affect the company.
External: Macro-demographic / economic, technological, social / cultural, political / legal /
Micro-customers, competitors, channels, suppliers, audiences
- Competitor analysis is a critical aspect of this step. Identifying current competitors as well as substitutes. Assessing competitors' objectives, strategies, strengths and weaknesses, and reaction patterns. Selecting which competitors to attack or avoid.
The following area analyzes are used to examine all the internal factors that affect a company:
Resources: profitability, sales, product quality brand associations, existing global brand, relative cost of this new product, employee capacity, product portfolio analysis
Capabilities: Goal: Identify internal strategic strengths, weaknesses, problems, limitations and uncertainties
External Analysis takes a look at the opportunities and threats that exist in your organization's environment. Both opportunities and threats are independent of the organization. To differentiate between strengths / weaknesses and opportunities / threats is to ask this essential question: Would this be a problem if the organization did not exist? If yes, it is a problem that is external to the organization. Opportunities are favorable conditions in an organization's environment that can produce rewards if they are properly exploited. Opportunities must be acted upon if the organization wants to take advantage of them. Threats are barriers presented to an organization that prevent them from achieving the desired objectives.
The following area analyzes are used to examine all external factors that affect a company:
- Customer analysis: Segments, motivations, unmet needs. Competitive analysis: fully identify, put in strategic groups, evaluate performance, image, objectives, strategies, culture, cost structure, strengths, weakness.
Market analysis: Total size, projected growth, profitability, entry barriers, cost structure, distribution system, trends, key success factors.
Environmental analysis: technological, governmental, economic, cultural, demographic areas, scenarios, information needs. Objective: Identify external opportunities, threats, trends and strategic uncertainties.
The SWOT matrix helps visualize the analysis. Furthermore, when running this analysis it is important to understand how these elements work together. When an organization matches its internal strengths with external opportunities, it creates core competencies to meet the needs of its customers. Furthermore, an organization must act to turn internal weaknesses into external strengths and threats into opportunities. Focus on your strengths. Climb your weaknesses. Take advantage of your opportunities. Acknowledge your threats.
Identify
- Who do we compete with? Who are our strongest competitors? Less intense? Manufacturers of substitute products? Can these competitors be grouped into strategic groups based on assets, competencies or strategies? Who are potential competitive competitors? What are your barriers to entry?
Evaluate
- What are your goals and strategies? What is your cost structure? Do they have a cost advantage or disadvantage? What is their image and positioning strategy? What are the most successful / unsuccessful competitors over time? Why? What are the strengths and weaknesses of each competitor? Assess competitors with respect to their assets and competencies.
Size and growth: What are the important and potentially important markets? What are its size and growth characteristics? Which markets are shrinking? What are the driving forces behind sales trends?
Profitability: For each main market consider the following: Is this a business in which the average company will earn money? How intense is the competition between existing companies? Assess threats from potential entrants and surrogates. What is the bargaining power of suppliers and customers? How attractive and profitable is the market now and in the future?
Cost structure: What are the main components of cost and value added for various types of competitors?
Distribution systems: What are the alternative distribution channels? How are they changing?
Market trends: What are the trends in the market?
Key success factors: What are the key success factors, assets, and competencies required to compete successfully? How will this change in the future?
Environmental Analysis: An environmental analysis is the fourth dimension of the External Analysis. Interest is in environmental trends and events that have the potential to affect strategy. This analysis should identify such trends and events and estimate their probability and impact. By conducting this type of analysis, it is easy to get bogged down in an extensive and comprehensive trend survey. It is necessary to restrict the analysis to those areas relevant enough to have a significant impact on the strategy.
This analysis is divided into five areas: economic, technological, political-legal, sociocultural, and future.
Economic: What economic trends could have an impact on business activity? (Interest rates, inflation, unemployment levels, energy availability, disposable income, etc.)
Technological: To what extent do existing technologies mature? What technological developments or trends are affecting or could affect our industry?
Government: What changes in regulation are possible? What will be its impact on our industry? What tax incentives or other incentives are being developed that could affect the development of the strategy? Are there risks of political or government stability?
Sociocultural: What are the current or emerging trends in lifestyle, fashion and other components of culture? What are its implications? What demographic trends will affect the size of the industry market? (That is, growth rate, income, population displacement) Do these trends represent an opportunity or a threat?
Future: What are the significant trends and future events? What are the key areas of uncertainty regarding trends or events that have the potential to impact the strategy?
Capacities
Resources are not productive on their own. The most productive tasks require resources to collaborate closely between teams. The term organizational capacity is used to refer to the capacity of a company to undertake a particular productive activity. The interest does not lie in the capabilities per se, but in the capabilities relative to other companies. The functional classification approach is used to identify the capabilities of the company. A functional classification identifies the organizational capacities in relation to each of the main functional areas.
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