Internal and External Environment Factors that Influences Organizational Decision Making

Every organization, whether business or non-business, has its own environment. Organizational environment is always dynamic. It is ever-changing.

Changes today are so frequent and every change brings so many challenges that it is highly essential for managers and leaders of the organization to be vigilant about the environmental changes. The environment of an organization consists of its surroundings – anything that affects its operations, favorably or unfavorably.

Environment embraces such abstract thing as an organization’s image and such remote visible issues as economic conditions of the country and political situations.

The environmental forces -abstracts and visible need careful analysis. The systematic and adequate analysis produces the information necessary for making judgments about what strategy to pursue.

Managers cannot make appropriate and sound strategy simply on the basis of their guesses and instincts. They must use relevant information that directly flows from the analysis of their organization’s environment.

Types of Organizational Environment

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.
    1. General environment.
    2. Industry environment.
  2. Internal Environment.

An organization’s operations are affected by both types of environment.

Therefore, it is essential for the managers to make an in-depth analysis of the elements of the environments so that they can develop in themselves an understanding of the internal and external situations of the organization. Based on their understanding, they will be better able to establish the required objectives for their organization and formulate appropriate strategies to achieve those objectives.

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

External environment embraces all general environmental factors and an organization’s specific industry-related factors. The general environmental factors include those factors that are common ir\ nature and generally affect all organizations.

Because of their general nature, an individual organization alone may not be able to substantially control their influence on its business operations.

The external environment can be subdivided into 2 layers;

  1. General Environment.
  2. Task / Industry Environment.

General Environment of Organization

The general environment usually includes political, economic, sociocultural, technological, legal, environmental (natural) and demographic factors in a particular country or region. 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.

Elements of the general environment are;

  1. Economic Dimension.
  2. Technological Dimension.
  3. Socio-cultural dimension.
  4. Political-Legal Dimension.
  5. International Dimension.

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 who 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 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 governing 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.

Industry/Task Environment of Organization

The industry environmental factors, on the other hand, are those factors in the external environment that specifically reside in a particular industry and affect competition such as suppliers, customers, competitors, and substitute products

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.

Elements of the industry or task environment are;

  1. Competitors.
  2. Customers.
  3. Suppliers.
  4. Regulators.
  5. Strategic Partners.

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 their 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 following 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 the government. Trade unions and the chamber of commerce are 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 generally consists of those elements that exist within or inside the organization such as physical resources, financial resources, human resources, information resources, technological resources, organization’s goodwill, corporate culture and the like.

Elements of internal environment are;

  1. Owners and Shareholders.
  2. Board of Directors.
  3. Employees.
  4. Organizational Culture.
  5. Resources of the Organization.

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

  1. Owners and Shareholders

    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.

    Owners of an organization may be an individual in the case of sole proprietorship business, partners in a partnership firm, shareholders or stockholders in a limited company or members in a cooperative society. In public enterprises, the government of the country is the owner.

    Whoever the owners, they are an integral part of the organization’s internal environment. Owners play an important role in influencing the affairs of the business. This is the reason why managers should take more care of the owners of their organizations.

  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, which 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. Organizational 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 the 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.

    An organization’s culture is viewed as the foundation of its internal environment. Organizational culture (or corporate culture) significantly influences employee behavior.

    Culture is important to every employee including managers who work in the organization.

    A strong culture helps a firm achieve its goals better than a firm having a weak culture. Culture in an organization develops and ‘blossoms’ over many years, starting from the practices of the founder(s).

    Since culture is an important internal environmental concern for an organization, managers need to understand its influence on organizational activities.

  5. Resources of the Organization

    An organization s resources can be discussed under five broad heads: physical resources, human resources; financial resources, informational resources, and technological resources. Physical resources include land and buildings, warehouses, all kinds of materials, equipment and machinery.

    Examples are office buildings, computers, furniture, fans, and air conditioners.

    Human resources include all employees of the organization from the top level to the lowest level of the organization. Examples are teachers in a university, marketing executives in a manufacturing company, and manual workers in a factory.

    Financial resources include capital used for financing the operations of the organization including working capital. Examples are investment by owners, profits, reserve funds, and revenues received out of a sale. Informational resources encompass ‘usable data needed to make effective decisions.

    Examples are sales forecasts, price lists from suppliers, market-related data, employee profile, and production reports.

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.

Conclusion: Influence of Environment on Business

Business managers must understand the various facets of the impacts of the external environment.

They need to recognize that the external environment has many aspects that can have a significant impact on the operations of a firm. They need to undertake analysis of environment on a regular basis.

This is particularly important for the reason that developments/changes in the remote environment influence the business organizations. They also need to understand the influences of changes in the industry environment.

Managers are benefited in several ways when they have a deep understanding and appreciation of the impact of environmental factors on business:

  • Knowledge of the environment helps managers identify the direction to which they should proceed. They will travel along with a distinct way of changing direction, whenever necessary. Without an understanding of the environment, managers are like a bicycle without a handlebar – no way of maneuvering while riding on a street.
  • Managers can isolate those factors, especially in the external environment, which are of specific interest to the organization.
  • Managers can take preparation to deal with a predicted crisis in any of the factors in the environment. They can develop crisis plans for overcoming crises that affect an organization.
  • The key to achieving organizational effectiveness is understanding of the environment in which the firm operates its
    No knowledge or inadequate knowledge is very likely to lead managers to ineffectiveness because of ‘running on the wrong road for reaching the goals.
MoreOrganizing /