Managerial decisions are affected by the external environment. Organizational performance depends on the successful management of the opportunities, challenges and risks presented by the external environment.
A host of external factors influence a firm’s choice of direction and action and ultimately organizational structure and internal processes.
Every firm is surrounded by 3 subcategories of environments:
a) The operating environment comprising labour, creditors, suppliers, customers and competitors.
b) The industry environment which comprise forces driving industry competition.
c) The remote external environment which comprise economic, social, political, technological and ecological factors.
One popular technique of analyzing the external environment is the SLEPT analysis which divides the environment into five related but separate systems – social, legal, economic, political and technical.
The social and cultural environment
The firm is influenced by changes in beliefs, values, habits and attitudes of society e.g.
• With the shift away from 9 – 5 working days to more flexible forms in some companies, supermarkets open until late and also IT now allows people to bank throughout the night.
• The number of women employees have also steadily increased and new policies have to be designed to cater for their ‘speed needs’
• Demographic changes affect demand e.g. emigration or falling birth rates. Changes in tastes and fashions also affect manufacturers especially in the fashion industry.
Legal environment
The legal environment is concerned with how a firm does its business and covers law of contract, treatment of workers, laws about the environment and legislation on competitive labour.
• The law can affect the firm in several ways: strict health and safety regulations increase costs. Premises failing to meet higher standards could be closed down or have their products banned. Tobacco companies are at present faced with the prospect of a ban on advertising.
• Management must also bear in mind other legal and regulatory parameters e.g. tax regulations and minimum wage allowed.
• The government sometimes can become an unbeatable competitor by allowing itself sole rights over certain businesses e.g. communications or by fully owning certain natural resources. Organizations must make strategic forecasts in such cases.
The Economic Environment
The current state of the economy can affect how a company performs. The economic influences include taxation levels, inflation, interest rates, GNP, the balance of trade and government subsidies.
A downturn in the economy will lead to corporate failures especially for suppliers of goods with a high-income elasticity of demand e.g. house owners or property management firms such as Lloyd Masika, Regent e.t.c.
Deflationary government fiscal policy and central bank monetary policy can have a highly damaging impact on business.
The Political Environment
The organization must react to the attitude of the political party in power at that time. The government is the nation’s largest supplier, employer, customer and investor and any change in government spending priorities will greatly affect business.
Political influence will include legislation on trading, dividends, employment, privatization and unemployment.
Most governments take actions on monopolies and restrictive practices, provide financial assistance to some ailing industries and take action to protect the environment.
The Technological Environment
This environment changes very rapidly and organizations must be constantly aware of what is going on.
A lot of new technology is found in communications particularly the Internet and also in Information Technology.
Technological changes influence production techniques, the type of products made and the services provided.
Failing to exploit IT and new production technology will lead to an organization falling behind its rivals and losing its competitive edge. Most companies now deliver services through IT especially banks.
Technology has led to the emergence of substitutes e.g. videos at home as opposed to going for cinemas.
Managers should seek to understand that their firms are environment dependent and their decisions must take into account the external environmental factors.
Competition
Competitors are organizations that offer similar or alternative products or services to the customer. Therefore the organization must compete for resources and also for market share. Knowledge of competitors is very important for corporate success. The competitors’ strengths and weaknesses must be evaluated so as to develop competitive strategies. Competitors affect a firm’s pricing decisions, location of industry, employment, product quality and attributes