The environment in which a business operates is a major consideration I in determining an organization’s design or structure. Considerations such as uncertainty, procurement, and competition are linked with the external environment. A company’s strategy and approach to operations must also be aligned with the limitations of its external environment.
Components of the External Business Environment: General and Specific
Systematic monitoring of the major external forces influencing organizations is necessary to improve the management of companies. Failure to consider a company’s general and specific business environments may affect the strategies that management will make and use.
The general business environment includes the economic, sociocultural, politico-legal, demographic, technological, and world and ecological situations; all these must be considered as managers plan, organize, staff, lead, and control their respective organizations.
Inflation, rates of interest, changing options in stock markets, and people’s spending habits are some examples of factors/elements of economic situations. Economic situations may affect management practices in organizations. For example, companies may postpone expansion plans if bank loan interests are too high.
Sociocultural situations include the customers’ changing values and preferences; customs could also affect management practices in companies. For example, Filipino customers are now conscious about the importance of avoiding fatty foods, so many food companies now make sure that the products they offer are cholesterol-free or are low in cholesterol. In doing so, they avoid losing their customers.
Politicolegal situations refer to national or local laws, international laws, and rules and regulations that influence organizational management. For example, labor laws related to preventing employers from firing their employees without due process require the former to allow the latter to exercise their right to present their position during disciplinary action before their employment can be terminated.
Demographic situations such as gender, age, education level, income, number of family members, geographic origin, etc., may also influence some managerial decisions in organizations. For example, decisions regarding the hiring of human resources may be affected by an organization’s management policy that shows prejudice to the hiring of married females who are in child-bearing age. This may be because they would like to minimize the payment of maternity leave benefits.
The technological situations of companies involve the use of varied types of electronic gadgets and advanced technology such as computers, robotics, microprocessors, and others that have revolutionized business management; e-commerce, teleconferencing, and sophisticated information systems have rapidly changed the ways that business is conducted in the 21st century.
World and ecological situations are related to the increasing number of global competitors and markets, as well as the nature and conditions of the changing natural environment. Products produced by companies, of course, must cater to the changing needs of people in the global community, while, at the same time, considering their impact on the natural environment. For example, car manufacturing managers must give the go signal for the development of vehicles that are environmentally friendly instead of only being focused on the product’s speed, fuel economy, and design.
Meanwhile, the specific business environment focuses on stake-holders, customers, pressure groups, and investors or owners and their employees.
Stakeholders are parties likely to be affected by the activities of the organization, while customers are those who patronize the organization’s products and services. Increasing customer sophistication makes it necessary for managers of organizations to make crucial decisions regarding the development of products with higher value and the improvement of their services to meet their patrons’ increasing demands. Also, this has prompted companies to solicit feedback from their customers to avoid dissatisfaction that may lead them to patronize another company offering similar products and services instead.
Suppliers are those who ensure the organization’s continuous flow of needed and reasonably priced inputs or materials required for producing their goods and rendering their services. Inputs mentioned also include financial and labor supply. Managers decide what, where, and when to buy their supplies and which supplier to favor with their organization’s supply orders.
Pressure groups are special-interest groups that try to exert influence on the organization’s decisions or actions. For instance, pressure from the Food and Drug Administration on some department stores and drug stores led them to stop selling beauty products containing lead and to stop ordering or importing such products from their suppliers.
The organization’s investors or owners provide the company with the financial support it needs. The company, of course, cannot exist without them; thus, they greatly influence organizational management. Top-level, middle-level, and lower-level managerial decisions are all influenced, in one way or another, by the investors or owners of organizations. Branching out, offering new products and services, and applying for needed loans are all affected by the investors’ or owners’ way of thinking.
Employees are comprised of those who work for another or for an employer in exchange of salaries/wages or other considerations. Employees execute the company’s strategies and are important for the maintenance of the company’s stability. For example, managerial decisions are influenced by the company’s knowledge workers.
Components of the Internal Business Environment
An organization’s internal business environment is composed of its resources, research and development, production, procurement of supplies, and the products and services it offers. The organization’s internal environment must also be subjected to internal analyses. Internal strengths and weaknesses, opportunities and threats with regards to its resources (financial, physical, mechanical; technological, and human resources), research and development endeavors, production of goods, procurement of supplies (materials, inputs, and finance), and products and services must all be considered prior to organizational planning.
Components of Environmental Scanning: Developing a Competitive Mindset, Considering Future Business Scenarios, Business Prediction, and Benchmarking
Adapting to environmental uncertainties must start with developing a competitive mindset. Ignorance of present-day realities may cause individuals or organizations to do certain things that they may regret in the future; hence, environmental scanning is necessary. By seeking for and sorting through data about the environment, you may be able to understand and predict the various changes, opportunities, and threats that may affect organizations in the future. Knowing the present-day competitors, the possible number of barriers to entering your chosen business industry, the existence or nonexistence of substitutes to your planned product or service, and possible dependence on powerful suppliers and customers will be helpful in developing a competitive mindset.
In preparation for future conditions that may influence your planned business endeavor, you must also consider future business scenarios. By realistic consideration of both worst-case scenario or unfavorable future conditions and the best-case scenario or favorable future conditions, as well as middle-ground possible conditions, you will have an idea of what to do in the future.
Meanwhile, business prediction, also known as business forecasting, is a method of predicting how variables in the environment will alter the future of business. It could be used in making decisions regarding offshoring, branching out locally, and expanding or downsizing the company. However, the accuracy of such business predictions cannot always be assured.
Another component of environmental scanning involves gauging the performance of the organization in relation to those of others; this is called benchmarking.
Benchmarking is defined as the process of measuring or comparing one’s own products, services, and practices with those of the recognized industry leaders in order to identify areas for improvement. Best prac-tices of said industry leaders are observed so that understanding their competitive advantage would be easier. This is followed by gathering information about the company’s own operations and those of the other company in order to identify gaps; this in, turn, could be used to find out the underlying reasons for performance differences. From these said reasons, a set of best practices in one’s own company will be listed down and that, ultimately, leads to the company’s improved performance.