The External Environment

Spring 2007 External Environment 1

 The External Environment
• A source of information and resources for the
organization
• Any area affecting the organization that is not within its
control…but
• “The totality of physical and social factors that are taken
directly into consideration in the decision-making
behaviors of individuals within the organization”
• Source of inputs and feedback, the destination of outputs

Spring 2007 External Environment 2

 Influencing the External
Environment

• Overall, the environment is what cannot

be influenced
• But….
• Advertising
• Public relations
• Trade associations
• Political activity

Spring 2007 External Environment 3

 Why Does the Environment Matter
?
• The organization must exist within the
constraints of the environment:
• Owner / public acceptance
• Economic survival
• The environment is the source of resources for
the organization
• Organizations’ responses to the external
environment will depend on how decision-
makers view the environment

Spring 2007 External Environment 4

 Role of the External Environment

Information

Adaptation Survival

Growth
Access to
Legitimacy
Resources

Resources Source: Starbuck (1965)

Spring 2007 External Environment 5

 Conceptualizing the Environment
• Characteristics
• Complexity (number of entities)
• Dynamism (rate of change)
• Munificence (availability of resources)
• Entities
• Task environment: immediately relevant to organization
• General environment: not immediately relevant to
organization
• An entity can move between task and general environment;
decision-makers must be aware of any movements

Spring 2007 External Environment 6

 The Task Environment
• Industry • Human Resources
• Competitors • Labor market
• Industry structure and • Employment agencies
size • Schools and
• Competitiveness universities
• Related industries • Other companies’
• Raw materials employees
• Suppliers • Labor unions
• Manufacturers • Market
• Real estate • Customers
• Services • Potential customers

Spring 2007 External Environment 7

 The General Environment
• Financial resources • Government
• Stock market • Local / state / federal laws and
• Banks regulations
• Investors • Court decisions
• Tax policy
• Technology
• Political pressures
• R&D
• Production • Socio-Cultural
• Automation • Population demographics
• New materials • Population values
• Social responsibility
• Economic conditions
• Recession / inflation • International
• Economic growth • Foreign firms’ activities
• Investment • Entry into foreign markets
• Unemployment • Cultural differences
• Political and legal differences
• Exchange rates

Spring 2007 External Environment 8

 An Economic View

• Porter’s Five Forces

• Suppliers
• Buyers
• Threat of substitutes
• New entrants to the market
• Current competitors

Spring 2007 External Environment 9