The environment is the set of forces surrounding an organization that have the potential to affect the way it operates and its access to scarce resources.
The environment includes:
1. Economic Environment
Economic environment refers to all forces that have an economic impact on business.
Business obtains all its needed inputs from the economic environment and it absorbs the output of business units. There is a close relationship between business and its economic environment.
2. Politico-legal Environment
The three political institutions: Legislature, Executive and Judicial exert influence and control business activities.
- The legislature decides on a particular course of action.
- The executive implements what is decided by the legislature.
- The judiciary ensures that the legislature and executive function in public interest.
A stable and dynamic political environment is necessary and is indispensable for the growth of business.
3. Socio-cultural Environment
Factors that can be included in the socio-cultural environment include people’s attitude to work and wealth, role of marriage and family life, religion and education, ethical issues and social responsiveness of business. Socio-cultural environment is very relevant to a business.
4. Technological Environment
Some have defined technology Opens in new window as the systematic application of knowledge to practical tasks.
Technology changes fast and organizations should be alert to adapt the changed technology in their businesses.
5. Global Environment
Organizations are forced to view business issues from a global perspective. Going international is yet another trend followed by modern business houses.
Globalization Opens in new window is fast becoming imperative for modern business due to technological innovations; crumbling trade barriers, information explosion; intensity of market competition and global flow of capital and technology.
Forces in the environment that affect an organization’s ability to secure scarce resources include competition from rivals for customers, rapid changes in technology, increase in price of inputs, etc. All these factors erode an organization’s competitive advantages.
Barry M Richman & Melvyn Copen says that “Environment factors or constraints are largely if not totally, external and beyond the control of individual industrial enterprises and their management. These are essentially the givers which firms and their managements must operate in a specific country and they vary often greatly, from country to country”.
Environment not just poses threats to an organization, it also offers immense opportunities for potential market exploitation. As William F Glueck and Lawrence R Jauch comment: “The environment includes factors outside the firm which can lead to opportunities for or threats to the firm. Although there are many factors, the most important of the sectors are socio-economic, technological, supplier, competitors and government”.
Besides, the factors mentioned by Glueck and Jauch, there is another factor to reckon with, and this factor is the global or international environment. Business responses and managerial practices must be fine-tuned to survive in the global environment. The world is becoming smaller due to advanced means of transport and communication facilities.
Managing the organizational environment is a crucial task for an organization. An organization needs to evaluate the benefits and costs of different inter-organizational strategies Opens in new window and choose the one that best allows it to secure valuable resources.
An organization must examine the whole array of its exchanges with its environment in order to devise the combination of linkage mechanism that will maximize its ability to create value.
Resource dependence theory Opens in new window argues that the goal of an organization is to minimize its dependencies on other organizations for critical resources needed by it. While the transaction cost theory Opens in new window argues that the goal of the organization is to minimize transition costs like cost of negotiating, monitoring and governing exchange.
Organizations must take steps that minimize transaction costs and internal transaction costs for which they must evolve linkage mechanism that ma range for informal types such as contracts to formal types like mergers and acquisition.