Importance of the Environment
The need to consider the forces external to the organization was first incorporated into management thought during the late 1950s. It was one of the major contributions of the systems approach to management which emphasizes and stresses the need for managers to view their organization as an entity of interrelated parts intertwined with the outside world. In an ever changing business environment as of today, changes in the outside world have made the need to consider the environment more important than ever. As Alvar Elbing states, “the external environment of an organization is a subject of increasing challenge for today’s managers”. Even if changes are not so significant, management would still have to consider the environment because, as an open system, an organization is dependent on the outside world for supplies, energy, workers and customers. As all these effect the organization’s very survival, management must be able not only to identify the factors in its environment but also to cope with them.
In this respect, organizations are similar to biological organisms. According to Charles Darwin’s theory of evolution, the species that have survived have done so because they were able to evolve and adapt to changes in their environment. Organizations, too, must adapt to changes in their environment in order to survive and be effective.
Direct Action versus Indirect Environment
The external environment affecting the organisation may be divided into two major categories – Direct action and Indirect action environment. Direct action environment consists of those factors that directly affect and are affected by the organization’s operations. These factors include suppliers, labor unions, and the various laws of the land, customers and competitors. The indirect action environment, on the other hand, consists of those factors that may not have an immediate direct effect on operations but nevertheless influence the activities of the firm. These include such factors as technology, socio-cultural and political factors, general economic conditions and so on. Let us now understand the impact of all these factors in detail.
40
Direct Action Environment
Suppliers
As already understood, an organization is a vehicle for transforming inputs into outputs. The important inputs are materials, equipment, energy, capital and labour. The relationship between the organization and the suppliers of these inputs presents the forces in the environment that directly influence the operations of a firm. If an organization is unable to obtain these essential inputs of right quality, quantity and at the right price, it cannot possibly achieve the objectives.
Laws
Virtually every aspect of the business is influenced by the laws of the land. The form of organization, the management and the way how a firm conducts itself in the society are very much influenced by the various provisions of the laws. For instance, The Companies Act, Factories Act, Workmen’s Compensation Act, Industrial Disputes Act, Provident Fund Act, just to name a few, affect the functioning of the business. As a responsible corporate citizen, an enterprise has to comply itself with the provisions of these acts.
Customers
The justification for the existence of a firm lies in the satisfaction of customer needs. In this context, it is appropriate to remember Peter F. Drucker’s observation on the purpose of business. According to him, the purpose of any business is to create a customer. There is no exaggeration that it is customers in the market place who dictate the fortunes of any business. Needless to say that those organisations which neglect the customer expectations and aspirations would find the long-term survival very difficult. Customers’ tastes and preferences are not static, but keep on changing. Mention may be made of some of the changes in the recent past: the cell phone, the preference for quartz watches, audio-video gadgets, various sophisticated domestic appliances, cotton garments, fast foods and so on. Organizations which are adept in identifying the changes in the customers’ attitudes and preferences or which can comfortably respond to the changes would survive and those which fail to take cognizance of changes would ultimately fall on the way side.
41
Competitors
Many a policy of the organization are influenced by the competitors. In a competitive environment, the market place is characterized by moves and countermoves. The post-liberalization Indian markets for many products offer an excellent example as to how competition influences the organizations. In the last few years, in almost all the sectors of the Indian economy, competition has tremendously increased. As a result, many firms are forced to wake up from their slumber. They are forced to unlearn many of the practices and attitudes of the pre-liberalization/protection era. Company after company is now redefining its business, rediscovering the markets, talking in feverish pitch about customer service, human resource development and concern for the society.
Indirect Environment
Indirect environment of business is usually more complex and uncertain than the direct. Management is often compelled to make assumptions about the impact of the various factors like technology, general economic conditions, socio-cultural and political factors. Let us, therefore, examine the impact of these factors on the business.
Technology
Technology, in the organizational context, influences the ways of doing things. It influences various processes. Technological changes affect the efficiency with which products are manufactured and sold, when a product will become obsolete, how information can be gathered and processed, and what customers expect from the organization’s products and so on. Important technological developments that have profoundly affected the organizations and society in the last two decades are the computer, cell phone technology, laser, xerography, integrated circuits, semiconductors, television, satellite communication, nuclear power, synthetic fuels and foods, etc. All these innovations have thoroughly changed the face of the society. Therefore, today’s organizations need to keep abreast of technological changes that affect their operations and products so as to remain competitive. Failure of the management to clearly gauge the technological changes would cost the business dearly. It endangers the very survival of the organization.
42
The pace at which technological changes occur varies from industry to industry. In some industries where technology is stabilized, the changes are less frequent and less turbulent. One the other hand in some industries like information technology, telecommunication systems, polymers, etc. changes are frequent. Depending upon the nature of business and the type of technology used, every organization has to assess the technological environment form time to time.
Economic Conditions
Managers must also assess how changes in general economic conditions will affect the operations. The fluctuations in economic activities of a nation as measured by the various parameters like the gross domestic product (GDP), price level, employment, aggregate demand and supply of consumer and industrial goods, etc. have far reaching impact on the prosperity of the business. These factors affect the cost of the inputs and the ability of customers to buy the goods and services. Organizations’ must be able to tackle effectively the inflationary and recessionary trends in the economy. When the economy is in an upbeat mood, firms normally benefit enormously and commit the resources for further growth with a hope of continuity of favorable economic conditions. Problems arise when the economy turns downswing. It is at that stage, firms have to adjust themselves to the down turn in economic conditions. Efficiency in operations, elimination of wastage, product planning, etc. hold the key for the survival of firms in such an adverse economic climate. As business organisations, in terms of size and impact, have grown into mega institutions, their failure will have disastrous effects on the society. By virtue of their size, they also influence significantly the economic stability of the nation. Further, it is important to note that a given change in economic environment may have a positive effect on some organizations and a negative effect on others. Therefore, a manager must be able to clearly assess the impact of changes in economic conditions on the industry in general and his firm in particular.
Socio-Cultural Factors
Organisations are affected by the culture of the particular society in many ways. Firms which have their operations in more than one country have to adapt to the respective cultures in an effective way. Otherwise, they
43
find it difficult to gain the acceptance of the society. Sound understanding of the cultural variables is all the more important for firms in a country like India where there are several diversities in cultures of various regions within the country.
Culture is a wider concept which includes value systems, beliefs, likes and dislikes, altitudes and perceptions. If the products or services of a firm are not in line with the culture of the place, they may not be accepted by the society. For instance, in India ‘Miss’ brand cigarette targeted at the women was a failure because it is against the cultural ethos of the society. Likewise at the international level, many brands have failed because they are out of tune with the respective cultures. At the same time, it may be remembered that certain products and services also affect the culture of a place. The satellite television and the cell phone that made deep inroads into the Indian culture, and how certain values particularly in the Indian youth are changing makes a good example.
As such, an organization cannot insulate itself from the sociocultural factors specific to a community. For example, paying bribes to obtain contracts or political favors, promotion on the basis of favoritism instead of competence, and spreading unfavorable rumors about a competitor are considered unethical and immoral business practices in many countries. In some countries such practices are seen as normal and accepted business practices because of differing socio-cultural factors. In this regard, General Electric’s former chairman Reginald Jones observation is worth mentioning. He states that “organizations must be able to anticipate the changing expectations of society; and serve them more effectively than competing firms. This means that the organization itself must change, consciously evolving into an institution adapted to the new environment”.
Political Environment
The performance, growth and survival of business in general, to a larger extent, depend on the attitude of the government towards business. Since government is fully empowered to monitor and control the various institutions of the society, the policies pursued by the government affects the business in a significant way. The continuity of policies is very much essential. That depends on the stability of the government of the
44