Chapter-05

Business Environment

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Organization’s Environment

A swimmer must assess the current, obstacles,

and distance before setting out. If these elements
are properly evaluated, the swimmer will arrive
at the expected point on the far bank of the
stream.

The organization is like the swimmer, and the

environment is like the stream.

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Organization’s environment refers to the set of
forces or actors that influences the performance of
an organization.

For Example: If political turmoil occurs (such as

hartal), organizations will remain closed. It is
political environment.

Environment

External Internal
Environment Environment

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External environment
The external environment is everything outside an
organization’s boundaries that might affect it. It cannot
be controlled by the organization.
Example: Technological environment, Economic
environment.

Internal environment
An organization’s internal environment consists of
conditions and forces within the organization. Of course,
not all parts of these environments are equally
important for all organizations.
Example: Owners, Board of directors, Employees

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The External Environment
An organization’s external environment consists of two
parts.
1. The general environment of an organization is the
set of broad dimensions and forces in its surroundings
that create its overall context. These dimensions and
forces are not necessarily associated with other
specific organizations.
2. The task environment consists of specific external
organizations or groups that influence an organization.
For example: Competitors, Customers.

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The General Environment

1. The Economic Dimension

The economic dimension of an organization’s general
environment is the overall health and vitality of the
economic system in which the organization operates.
Particularly important economic factors for business
are general economic growth, inflation, interest rates, and
unemployment.
2.The Technological Dimension
The technological dimension of the general
environment refers to the methods available for
converting resources into products or services.
Although technology is applied within the
organization, the forms and availability of that
technology come from the general environment.
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3. The Socio-cultural Dimension
The socio-cultural dimension of the general
environment includes the customs, mores,
values, and demographic characteristics of the
society in which the organization functions.
Socio-cultural processes are important because
they determine the products, services, and
standards of conduct that the society is likely to
value.

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4.The Political-Legal Dimension
The political-legal dimension of the general environment
refers to government regulation of business and the
relationship between business and government.

This dimension is important for three basic reasons.

 First, the legal system partially defines what an
organization can and cannot do.
 Second, pro- or anti-business sentiment in government
influences business activity.
 Finally, political stability has ramifications for planning.

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5.The International Dimension
Yet another component of the general environment for
many organizations is the international dimension, or
the extent to which an organization is involved in or
affected by businesses in other countries.

Multinational firms such as General Electric, Boeing,

Nestlé, Sony, Siemens, and Hyundai clearly affect and are
affected by international conditions and markets.

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The Task Environment
1. Competitors
An organization’s competitors are other
organizations that compete with it for resources.
The most obvious resources that competitors vie
for are customer dollars.
Nor is competition limited to business firms.
Universities compete with trade schools, the
military, other universities.
Organizations may also compete for different kinds
of resources besides consumer dollars. For
example, two totally unrelated organizations might
compete to acquire a loan from a bank that has
only limited funds to lend.

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2. Customers
Second dimension of the task environment is
customers, or whoever pays money to acquire an
organization’s products or services.
But customers need not be individuals. Schools,
hospitals, government agencies, wholesalers, retailers,
and manufacturers are just a few of the many kinds of
organizations that may be major customers of other
organizations.
Dealing with customers has become increasingly
complex in recent years.
Companies face especially critical differences among
customers as they expand internationally.

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Example
➢ McDonald’s sells beer in its German restaurants, and
wine in its French restaurants.
➢ Customers in those countries see those particular
beverages as normal parts of a meal, much as customers
in the United States routinely drink water, tea, or soft
drinks with their meals.

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3. Suppliers
Suppliers are organizations that provide resources for
other organizations.
McDonald’s buys soft-drink products from Coca-Cola.
A business should try to avoid depending exclusively on
particular suppliers because a firm that buys all of a
certain resource from one supplier may be vulnerable if
the supplier raises its prices, goes out of business, or is
shut down by a labor strike.
This practice can also help maintain a competitive
relationship among suppliers, keeping costs down.

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4. Strategic Partners
Another dimension of the task environment is
strategic partners (also called strategic allies)—two or
more companies that work together in joint ventures or
other partnerships.
➢ Strategic partnerships help companies get from other
companies the expertise they lack.
➢ They also help spread risk and open new market
opportunities.

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5. Regulators
Regulators are elements of the task environment that
have the potential to control, legislate, or otherwise
influence an organization’s policies and practices. There
are two important kinds of regulators.
➢ The first, regulatory agencies, are created by the
government to protect the public from certain business
practices or to protect organizations from one another.
➢ The second, interest groups, are organized by their
members to attempt to influence organizations.

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The Internal Environment
1.Owners
The owners of a business are, of course, the people who
have legal property rights to that business.

Owners can be a single individual who establishes and

runs a small business, partners who jointly own the
business, individual investors who buy stock in a
corporation, or other organizations.

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2. Board of Directors
A corporate board of directors is a governing body
elected by the stockholders and charged with
overseeing the general management of the firm to
ensure that it is being run in a way that best serves the
stockholders’ interests.

Some boards are relatively passive. They perform a

general oversight function but seldom get actively
involved in how the company is really being run.

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3. Employees
An organization’s employees are also a major
element of its internal environment. Of particular
interest to managers today is the changing nature of
the workforce, as it becomes increasingly diverse in
terms of gender, ethnicity, age, and other dimensions.

Another trend in many firms is increased reliance on

temporary workers—individuals hired for short
periods of time with no expectation of permanent
employment.

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4. Physical Work Environment
A final part of the internal environment is the actual
physical environment of the organization and the
work that people do.

➢ Some facilities have long halls lined with traditional

offices. Others have modular cubicles with partial
walls and no doors.
➢ The president’s desk is located in the very center of
the room, while others are arrayed in concentric
circles around it.

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Increasingly, newer facilities have an even more open
arrangement, where people work in large rooms,
moving among different tables to interact with different
people on different projects.

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The Organization’s Culture
Organization culture is the set of values, beliefs,
behaviors, customs, and attitudes that are shared
by the members of the organization.
It helps the members of the organization understand
what it stands for, how it does things, and what it
considers important.
Nevertheless, because it is the foundation of the
organization’s internal environment, it plays a major role
in shaping managerial behavior.

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The Importance of Organization Culture

Culture determines the “feel” of the organization.

The stereotypic image of Microsoft, for example, is a

workplace where people dress very casually and work very
long hours.

In contrast, the image of Bank of America for some

observers is a formal setting with rigid work rules and
people dressed in conservative business attire.

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Of course, the same culture is not necessarily found
throughout an entire organization.
For example, the sales and marketing department
may have a culture quite different from that of the
operations and manufacturing department.

Regardless of its nature, however, culture is a

powerful force in organizations, one that can shape
the firm’s overall effectiveness and long-term
success.

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