Chapter 1

By

MOHAMMAD SHAHID KHAN

M.B.A., M.Sc.(Economics), B.Cs., B.Ed.
Lecturer in Economics and Business Administration
KARDAN Institute of Higher Education, Kabul
After studying this chapter, you should be able to:
 Distinguish between Internal and External Environment of
an organization
 Explain the concept of External Environment and its two
layers
◦ Mega External-Environment and its major elements.
◦ Task External-Environment and its major elements.
 Explain the concept of Internal Environment and outline its
major elements.
The environment is defined as inside and outside institutions and
forces that potentially affect an organization’s performance.
There are various forces in the environment that play a
major role in shaping managers’ actions.

Types of Environment:
1) External Environment
2) Internal Environment
 External Environment:
Environment outside the organization is called external
environment, it has two layers i.e. task environment and Mega-
environment.

External Environment refers to the major forces outside the

organization with potential to influence significantly the
organization’s product or service likely success.

 Internal Environment:
Environment inside the organization is called internal
environment, which includes employees, culture and
management.
The Internal and External environments of the organization

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External Environment is decomposed into two groups:
a.Mega-Environment
b.Task-Environment

Let discuss them in detail one by one

The broad conditions and trends in societies in which an
organization operates. The mega-environment consists of five
elements:
Technological elements

Economics elements

Legal-political elements

Socio-cultural elements

International elements
 Technological Element:
The technological element reflects current knowledge about
production of products and services.
To remain competitive, organizations must understand current
technology developments affecting their ability to offer
desirable products and services.
 Economic Element:
the economic element involves systems of wealth production,
distribution and consumption.
Capitalist Economy: Economy in which activities are governed by
market forces and the means of production are owned by individuals.

Socialist Economy: Economy in which means of production are owned

by the state and economic activities are coordinated by plan prepared by
Central Committee.

Mixed-Economy: Economy in which the resources are owned by private

and public sector both. The market forces play their role but government
influences these forces to avoid inflation in the country.
 Legal-Political Element:
The legal-political element refers to legal and governmental
systems within which an organization functions. Trends in
legislation, court decisions, politics and government regulation are
important legal-political environment aspects.
For example, organizations operate within the general legal
framework of every country in which they do business. They are
governed by many laws specifically addressing their functioning.
Such laws may includes Acts aimed at controlling Pollution and
workforce Health & Safety.
Political processes also influence the legal system. Political issues
may result in government regulation of various areas..
 Socio-cultural Element:
the socio-cultural element involves attitude, values, beliefs and behaviors of the people
in a given area.

Multi-national companies face the problem of socio-cultural differences influencing

their success.
 International Element:
the international element of the Mega-Environment includes changes in countries
other than the organization’s home country with potential to influence the
organization.

International issues greatly affect an organization’s conduct of business aboard. For

example, currency fluctuation influence an organization’s ability to compete globally.

Free-trade agreements and WTO also affects the managerial decision of an

organizations.
 International Element: Technological Element:
•Fuji-Xerox •Smart copier
•Xerox-Canada •Digital copier
•International Competition •Color copiers

Economic Element:
Socio-Cultural Element: •Inflation
XEROX
•Global Warming •Volatility of global
•Home use of machines such capital market
as photocopier and fax
machines has increased.

Legal-Political Element:
•Patient Law
•Trade restrictions
•Nationalization
Specific outside elements with which an organization interfaces in
the course of conducting business:
Customers

Competitors

Suppliers

LabourMarket
Government Agencies
 Customers :
an organization’s customers are individuals and organizations
who purchase its products and services.
Many organizations try to stay close to the customers, paying
particular attention to services and quality, listening to
customers and trying to serve them better.

 Competitors:
An organization’s competitors are other organizations offering
the same products or services. Organization must be concerned
with known competitors and monitor for potential new entrants.
 Suppliers:
an organization’s suppliers are organizations and individuals
supplying resources such as raw materials, products, services
to conduct operations.
The conventional view that it is best to have many suppliers to
reduce dependence on any one. World competition is changing
this. Companies find they can trim costs by reducing supplier
numbers and contracting them.

 Competitors:
An organization’s competitors are other organizations offering
the same products or services. Organization must be
concerned with known competitors and monitor for potential
new entrants.
 Labour Market:
An organization’s labour supply consists of people employable
by the organization. The ability to attract, motivate and retain
human Resources to provide products and services is crucial
for organizations.

 Government Agencies:
Various government agencies provide services and monitor
compliance with the law and regulations at local, state or
national levels.
Usually an organization's task environment involves
interactions with representatives of specific government
agencies e.g. tax, police, health and worker’s salary.
 Government Agencies:
•Environmental Protection Customers and Clients:
Agencies •AT & T
•Securities and Exchange •Du Pont
Commission •Sun Microsystems
•Department of Defense

Suppliers: Competitors:
XEROX
•Reel Manufacturing Co. •Canon
•Rogers Corporation •Kodak
•Nationwide Precision •IBM
•AMPLACO

Labour Supply:
•Varying Labour Markets
•Unions
•Foreign workers
The major elements of the Internal Environment of an organization
are:
•Management Capabilities
•Trained Employees
•Latest Technology (Management Information System (MIS))
•Sound Financial Position
Internal Environment…. continued

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