Internal and External Environment Factors that Influences Organizational Decision Making

By the word “environment” we understand the surrounding or conditions in which a particular activity is carried on.

And we know that organization is a social entity that has a hierarchical structure where all necessary items are put together and they act within it to reach the collective goal.

Organization or more specific business organization and it activates are always being affected by the environment. In an organization, every action of the management body is influenced by the environment.

organizational environment

Organizations have an external and internal environment;

  1. External Environment.
  2. Internal Environment.

In this post, we will look at the elements of organizations environment.

External Environment of Organization

In a simple way factor outside or organization are the elements of the external environment. The organization has no control over how the external environment elements will shape up.

The external environment can be subdivided into 2 layers: the general environment and the task environment.

  1. General Environment
  2. Task Environment

General Environment of Organization

The general environment consists of factors that may have an immediate direct effect on operations but nevertheless influences the activities of the firm.

The dimensions of the general environment are broad and non-specific whereas the dimensions of the task environment are composed of the specific organization.

Let’s see the elements or dimensions of the general environment.

  1. Economic Dimension

    The economic dimension of an organization is the overall status if the economic system in which the organization operates. The important economic factors for business are inflation, interest rates, and unemployment.

    These factors of the economy always affect the demand for products. During inflation, the company pays more for its resources and to cover the higher costs for it, they raise commodity prices.

    When interest rates are high, customers are less willing to borrow money and the company itself must pay more when it borrows. When unemployment is high, the company is able to be very selective about whom it hires, but customers’ buying power is low as fewer people are working.

  2. Technological Dimension

    It denotes to the methods available for converting resources into products or services. Managers must be careful about the technological dimension. Investment decision must be accurate in new technologies and they must be adaptable to them.

  3. Socio-cultural dimension

    Customs, mores, values and demographic characteristics of the society in which the organization operates are what made up the socio-cultural dimension of the general environment.

    The socio-cultural dimension must be well studied by a manager.It indicates the product, services, and standards of conduct that the society is likely to value and appreciate. The standard of business conduct vary from culture to culture and so does the taste and necessity of products and services.

  4. Political-Legal Dimension

    The politico-legal dimension of the general environment refers to the government law of business, business-government relationship and the overall political and legal situation of a country. Business laws of a country set the dos and don ts of an organization.

    A good business-government relationship is essential to the economy and most importantly for the business. And the overall situation of law implementation and justices in a country indicates that there is a favorable situation in of business in a country.

  5. International Dimension

    Virtually every organization is affected by the international dimension. It refers to the degree to which an organization is involved in or affected by businesses in other countries.

    Global society concept has brought all the nation together and modern network of communication and transportation technology, almost every part of the world is connected.

Task Environment of Organization

The task environment consists of factors that directly affect and are affected by the organization’s operations. These factors include suppliers, customers, competitors, regulators and so on.

A manager can identify environmental factors of specific interest rather than having to deal with a more abstract dimension of the general environment.

The different elements of the task environment may be discussed as under:

  1. Competitors

    Policies of the organization are often influenced by the competitors.

    Competitive marketplace companies are always trying to stay and go further ahead of the competitors. In the current world economy, the competition and competitors in all respects have increased tremendously.

    The positive effect of this is that the customers always have options and the overall quality of products goes high.

  2. Customers

    “Satisfaction of customer”- the primary goal of every organization. The customer is who pays money for the organization’s product or services. They are the peoples who hand them the profit that the companies are targeting.

    Managers should pay close attention to the customers’ dimension of the task environment because its customers purchase that keeps a company alive and sound.

  3. Suppliers

    Suppliers are the providers of production or service materials. Dealing with suppliers is an important task of management.

    A good relationship between the organization and the suppliers is important for an organization to keep a steady follow of quality input materials.

  4. Regulators

    Regulators are units in the task environment that have the authority to control, regulate or influence an organization’s policies and practices.

    Government agencies are the main player in the environment and interest groups are created by its members to attempt to influence organizations as well as government. Trade unions and chamber of commerce are the common examples of an interest group.

  5. Strategic Partners

    They are the organization and individuals with whom the organization is to an agreement or understanding for the benefit of the organization. These strategic partners in some way influence the organization’s activities in various ways.

Internal Environment of Organization

Forces or conditions or surroundings within the boundary of the organization are the elements of the internal environment of the organization.

The internal environment consists mainly of the organization’s owners, the board of directors, employees and culture.

  1. Owners

    Owners are people who invested in the company and have property rights and claims on the organization. Owners can be an individual or group of person who started the company; or who bought a share of the company in the share market.

    They have the right to change the company’s policy at any time.

  2. Board of Directors

    The board of directors is the governing body of the company who are elected by stockholders, and they are given the responsibility for overseeing a firm’s top managers such as the general manager.

  3. Employees

    Employees or the workforce, the most important element of an organization’s internal environment, who performs the tasks of the administration. Individual employees and also the labor unions they join are important parts of the internal environment.

    If managed properly they can positively change the organization’s policy. But ill-management of the workforce could lead to a catastrophic situation for the company.

  4. Culture

    Organizational culture is the collective behavior of members of an organization and the values, visions, beliefs, habits that they attach to their actions.

    An organization’s culture plays a major role in shaping its success because culture is an important determinant of how well their organization will perform.

    As the foundation of the organization’s internal environment, it plays a major role in shaping managerial behavior.

The environment irrespective of its external or internal nature, a manager must have a clear understanding of them. Normally, you would not go for a walk in the rain without an umbrella, because you understand the environment and you know when it rains you can get wet.

Similarly, if a manager does not know and understand the environment of the organization, he or she will definitively get wet or dry and the organization also in today’s fast and hyper-moving organizational environment.

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