Environment is a force or a factor within or outside an organization that influences its performance either positively or negatively. The organization is surrounded by two main environments – internal and external. The internal environment consists of the firm itself, the owners or shareholders, the employees, internal technology, internal suppliers and internal financiers. The internal environment is largely controllable and the organization can manipulate it to its advantage. On the other hand, the external environment mainly consists of the forces beyond the control of an organization such as the pestel factors. Pestel is an acronym for political, economic, social-cultural, technological, ecological/environmental and legal environments.
a) Political factors
This explains the level of government’s involvement in the national economy like Kenya in political, social and economic matters. Political factors include government policies, political ideologies, political affiliations and provision of public goods in the economy. Examples may include the tax policy, the labour law, environmental law, trade restrictions, tariffs and political stability. Political factors also include areas like goods and services bought or banned by the government. The government is a major buyer of goods and services in the economy to support sectors like health, education, agriculture and infrastructure among others. Political factors can either be a threat or an opportunity to an organization.
b) Economic factors
These factors include areas like economic growth, interest rates, exchange rates, inflation rate, the gross national product, income per capita, employment levels and so on. They significantly affect how organizations operate either positively or negatively. For example, interest rates affect a firm’s cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy while inflation affects the cost of the factors of production.
c) Social- cultural factors
These include the cultural aspects of the population for example, health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety, religion, connotations, tastes and preferences. Changes in social factors affect the demand for a company’s products and how it operates. For example, changes in tastes and preferences of people may lead to a loss of a big chunk of the market.
d) Technological factors
The factors above include changes in processes and configurations due to innovation, automation, new inventions, research and development activities among others. Technological changes can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
e) Environmental factors
These include weather as well as climate and climate change, which mostly affect industries such as tourism, agriculture and insurance. This also covers issues like pollution and waste management. Growing awareness to climate change and environmental issues is affecting how companies operate and the products they offer.
f) Legal factors
Legal factors include issues like consumer law, antitrust law, labour laws, copyrights, health and safety laws and bylaws. These factors can affect how a company operates, its costs and the demand for its products. The bottom-line is that the company needs to operate within the laws.
To survive and win in a competitive environment, organizations have to gain competitive advantage over their competitors and earn a profit .Organizations gain a competitive advantage by continuously improving how they conduct business in order to thrive and be better than their competitors. To succeed in the environment, the managers must deliver the following fundamental success drivers: quality, cost effectiveness, speed, innovation, technology and globalization.
Quality is the excellence of your products and services. Customers’ expectations have increased on the quality of goods and services they expect to buy from their suppliers. Customers now demand high-quality goods and services, and often they will accept nothing below their expected quality. For a company to survive in a competitive environment, it has to produce and supply products of high quality. W. Edwards Deming, and J. M. Juran and other quality gurus popularised the need for organizations to embrace Total Quality Management (TQM) which encourages managers to ensure the following are achieved:
1. Preventing defects before they occur;
2. Designing products for quality;
3. Embracing the philosophy of continuous improvement;
4. Ensuring quality is the responsibility of all employees in the organization;
5. Top management should be committed to quality improvement;
6. Managers should thrive to exceed their customers’ expectation in meeting their quality requirement.
Service quality is vital as well. Managers should ensure their customers are given high quality goods and services to satisfy them and exceed their expectations. Companies can achieve customer satisfaction by listening to the customers’ description of the quality of goods and services they would like to receive from them. Providing world class quality requires a thorough understanding of what quality really is through your customers’ expectations. Quality can be measured in terms of product performance, customer service, reliability, conforming to standards, durability and aesthetics.
2. Cost effectiveness
Cost effectiveness means that a company’s products and services costs are kept low enough so that you can realize profits, while pricing your products (goods or services) at levels that are attractive to consumers.
Speed is the fast and timely execution response, and delivery of results. Speed separates winners from losers. How fast can an organization develop and get a new product to market? How quickly can it respond to customer requests? An organization is far better off if it is faster than the competition and if it can respond quickly to your competitors’ actions. Speed is a competitive imperative these days.
Innovation is the introduction of new goods and services. A firm must adapt to changes in consumer demands and to competitors. Companies cannot survive in today’s business environment without continuously being innovative. Innovation adds to a company’s competitive advantage, so it should be a strategic goal and must be managed properly.
5. Knowledge management
Today’s manager must create a work environment that attracts good people, makes them want to stay and inspires creative ideas from everyone. The goal is to turn the brain power of their employees into profitable products. These are practices aimed at discovering and harnessing the organization’s intellectual resources. Intellectual capital is the collective brainpower or shared knowledge of a workforce that can be used to create value in the organization. Due to competition, organizations need to combine the employees’ talents to achieve unique and significant results. A knowledgeable worker is very valuable to organizations today. This is someone whose knowledge is a critical asset to the organization.
Knowledge management is about finding, unlocking, sharing, and altogether capitalising on the most precious resources of an organization which are people’s expertise, skills, wisdom and relationships. Knowledgeable managers find human assets, help people collaborate and learn, help people generate new ideas, and harness those ideas into successful innovations. Due to the importance of knowledge management, a new career has been developed and companies are searching for knowledge managers.
Organizations cannot survive in today’s business environment without the support of appropriate technology. For the purpose of speed, achieving quality standards and getting to be competitive in the market, technology should be embraced by all businesses. Managers therefore should be informed on the technological innovations so that they can adapt the new technology where necessary. Technology can be defined as the methods, processes, systems, and skills used to transform resources into products.
It is the worldwide interdependence of resource flows, product market and business competition. In a globalised world, countries and people are increasingly interconnected through the news, in travel and lifestyles, in labour markets and employment patterns, and in business dealings. Managers need to be enlightened to global realities. This is because globalisation affects all types of business. Companies are in great pressure to improve their products and services so as to face the intense competition from foreign companies.
Environment analysis may be approached from several ways:
a) From an input – output analysis whereby the major environment aspects are human resources, capital, managerial and technical factors as inputs. On the other hand, products, services and profits are outputs.
b) Social responsibility and ethics approach: Focuses on the claimants in the environment such as the employees, consumers, suppliers, trade unions, government and the general public. Each of them will have a claim in the organization.
c) The external – internal approach to the analysis of environment. It gives the following as components:
• Technological, economic, political – legal
• Social-cultural, historical & geographical
The internal environment component includes mainly the firm’s internal resources, tools, equipment, plants, the financial resources, the human resources, the technological resources as well as the marketing resources. For internal environment, the analysis is SWOT (strengths, weaknesses, opportunities and threats).
The internal environment provides the organization with strengths (strong brand name, strong financial base, skilled workforce) and weaknesses (weak management, limited products, weak technology and processes) while the external environment provides opportunities (merger, new sources of raw materials, withdrawal of a strong competitor) and threats (entry of a strong competitor, political instability, changes in tastes and preferences among others). The internal environment is easily controlled by the management while the external one is not easy. In the analysis of external environment consider the dynamism (how fast is it changing)?
Organisational context refers to the organization with its interactions with the surrounding. Context explains the circumstances surrounding the organization. It explains what comes before and what comes after. In systems approach we have:
Since organizational context explains what surrounds the firm, whatever is within the environment of the organization influences the way it behaves.
There are FOUR contextual dimensions/factors that influence the organization. These are:
1. Environment and design: There is a relationship between organizations
• Mechanistic – Things are more stable and predictable
• Organic – A dynamic environment with a lot of changes.
Mechanistic design which resembles the bureaucratic organization emphasizes on the rules, specialised jobs and centralised authority. In organic designs, rules and regulations are minimal, tasks are done more in groups rather than individual. Authority is decentralised, members often gather information on their own and figure out what to do rather than rely on directives from superiors.
Two other British researchers suggested that organizations vary along two dimensions as a result of the environment. These are differentiation and integration. Differentiation describes the extent to which the organization is broken down into departments that differ by managers, orientations and structures e.g. Unilever Kenya, an organization which has many departments has a high level of differentiation while one with few departments has a low level of differentiation.
Integration is the degree of collaboration that exists among departments e.g. EABL. High integration occurs when managers must coordinate their activities with other departments. Low integration occurs when departments can operate autonomously and therefore coordination between departments is not required.
Generally, a complex and rapidly changing environment increases the need for differentiation and integration of an organization. A complex environment requires that managers create highly specialised departments to develop expertise and handle the demand of uncertainty due to environmental changes. Increased integration is necessary as frequent changes require greater information processing and adjustments within and across departments.
Managers of an organization in a stable environment should develop structures that are mechanistic in order to be effective. If the environment is unstable, managers should adopt an organic design for their organization. Managers however need to recognise that the environment varies by complexity. When the environment is highly complex, an organization should be differentiated with each department developing structures that are best to suit it to the part of environment it deals with. Integration is necessary when the departments must work together and when the environment is unstable.
2. Strategy and design: A strategy is a general plan of action which shows how a company can mobilise resources and how it is to deploy them to achieve an objective. Structure follows strategy. Structure is the means by which strategy is implemented. Therefore, organization strategy is closely related to the company’s environment and this relationship influences the structure of the firm.
Organization Aim Operate in an environment Strategy Structure
3. Size and organization: The size of an organization influences the way it affects the environment. The more complex and the bigger the organization, the greater the influence will be on the environment. The size of an organization can be measured in a variety of ways for example market share, total revenue, number of employees, total capital investment and scope of operations.
4. Technology and design: Technology is a conversion process that transforms organizational inputs into finished output or products. Technology is not merely machinery but also includes knowledge, tools techniques and actions that are necessary to complete the transformation process. It has been found in practice that technology affects management practices and styles, manufacturing processes, size of the firm, economic performance and structure. The more complex the technology, the more complicated is the management style.
Systems approach to organizations
Organizations are viewed as systems. A system is a group of things or parts working together in a regular relationship. This relationship can be regular interaction and interdependence. Systems approach to organization is based on the assumptions and ideas of an Australian Biologist Ludwig Von Bertalanffy (1951). In the theory of systems, there are two types of systems; closed and open.
A closed system
Closed systems supply its own inputs and must consume its own output. It is difficult for such systems to exist in nature. Monasteries in remote mountainous areas come close to these systems.
An open system
All organizations are open systems i.e. they actively interact with their environment. They receive both demand and inputs from the environment. They process the raw materials into finished goods/services and they export the same into the environment. The external environment is composed of the government, labour organizations, consumers, suppliers and the general public. A system is composed of sub-systems. These sub-systems can be the input systems, transformation systems and the output systems.The term product is a generic label for the product of a productive system. It can be a good or a service. Goods are defined as movable personal property such as cars, computers, and desks. Capital goods are immovable personal property such as land, buildings, and factories and so on. A service is an activity required by a customer or work done for another person.
Characteristics of an open system
1. They receive inputs from the environment in form of labour, capital, raw materials, water or even air.
2. All open systems have a transformation process called production function. This is the process by which the inputs are transformed into finished products and services. The transformation process is affected by the external environment. These include the weather conditions, government regulations, equipment breakdown or natural disasters as earthquakes, hurricanes and landslides.
3. Interrelationships of subsystems. All natural as well as man-made systems are inter related, otherwise they would not exist. Our universe, the galaxies, the solar system, the world, the country, the city, the organization and individuals are all part of a system.
Nothing is independent in nature. An organization (like a company) is composed of departments and divisions which are all interrelated. Von Bertalanffy emphasized that the survival or failure of the system is dependent on the interrelationships of the subsystems and their contribution to the overall purpose of the system. Therefore, activities in a production department of a company will be determined largely by the sales department which depends on budget allocation from accounts department which in turn depends on other departments.
Dr. Kellen Kiambati holds a PhD in business administration with a focus on strategic management from JKUAT and an MBA from KEMU. She is a certified business associate (CBPA) and a member of the Institute of Human Resource Management of Kenya. She is also the author of business Research Methods and can be reached on firstname.lastname@example.org