Environmental factors of the organisation

Analysing the business environment

 Objectives.

• To explain the challenge of change

• To explore what organisational environmental factors are
• To explain the importance of environmental factors to
organisations
• To indentify and explain direct and indirect factor elements
of the environment
• To identify the stakeholders of the organisation and their
varied interests
• To explain advantages and disadvantages in international
trade
 The challenge of change

• The end of world war 2 marked the beginning of the industrial revolution.
Since then the external environment has been undergoing continuous and
rapid changes with far reaching effects on organisations and their
management strategies

• Rapid technological change( e.g. mechanisation, mass production and

robotics) have revolutionalised the production processes

• Improved information processing technology, communications technology

and advanced transport systems have eliminated thousands of middle
management positions in organisations across industries
 The challenge of change cont:

• Customers too have become more complex

especially with increased product choice and access
to education and communications technology.
• Globalisation has made accessibility and availability
of goods and services easier ( talk of bondaryless
markets) - Globalisation has condensed the trading
arena tremendously as people can order products of
their choice from anywhere in the world with orders
being delivered shortly (talk of the global village).
 Challenge of change cont:

• As a way of seeking growth and survival, managers’

task is no longer the satisfaction of stockholders goals
only but other stakeholders’ demands.
• Organisations must operate like real systems which are
environmentally influenced and environmentally
influencing institutions short of that, they will sink.
• The silo mentality, the era of self containment, and self
sufficiency has no room in today’s business: hence
ignoring the external environments is one of the fastest
ways of going under.
Complexities of the organisational environment
by Griffin(2008:5)

• Rapid change
• Globalisation
• Domestic competition
• Government regulation
• Internet related uncertainties
• Unexpected interruptions
• Crises
 The external environment factors.

• These are factors outside an organisation that are relevant to the

organisation’s operations, often divided into direct-action and
indirect-action elements.
• Direct-action elements are elements of the environment(external
stakeholders) that directly influence an organisation’s activities e.g
customers, suppliers, government, special interest groups, the
media, labour unions, financial institutions and competitors and
others.
• Indirect-action elements are external environment elements that
affect the climate in which the organisation activities take place, but
do not affect the organisation directly e.g. technological factors,
socio-cultural factors, economic factors and political factors [ PEST
factors].
 PEST analysis (Indirect-action)environment.

1. Political variables.
• Emanate from the political process and political climate in
an economy(political system(s) influence government
policy and determines which countries you are going to do
business with or not
• The political climate (how politics relate to business) can
range from being lenient to management to being rigorous:
Government policy can allow management freedom to act
or limit what management can do(its either supportive or
suspicious)
• Usually there will be competition between various groups
that want to advance their own interests
• Attitudes towards deregulation and privatization
 PEST ANALYSIS CONT:

2. Economic variables
• General economic factors that may be relevant in an organisation’s
activities include wages, prices, inflation, tax levels, interest rates
and currency control regimes.
• The impact of national economic indicators such as income levels,
productivity, savings, unemployment rates and international trade
on an organisation are critical.(See extract of economic indicators
from Stoner page 78 ).
• Two major economic challenges are Structural change and cyclical
change. Structural change is experienced when there is a major
shift in relationships between different sectors of the economy and
key economic variables.e.g the move from being an industrial
economy to being a service economy. Economic cycles are periodic
swings in general economic activity such as the rise and fall of
inflation or interest rates.
 PEST ANALYSIS CONT:

3. Social variables (demographics, life styles and social values)

• Demographics are generally about the makeup of the
population-they affect country productivity, country
competitiveness, labour supply, market size,
unemployment government and attitude consumption
behaviour of people c/o population growth rate, aging, life
expectancy, fertility rate and the sand which generation.
• Lifestyles are the outward manifestations of people’s
attitude and values. Issues to watch include, changing life
styles,i.e.one parent families, child headed families, women
in leadership positions, better education, people driving
luxury cars, mushrooming of condominiums, and attitudes
towards physical fitness(diet & gym euphoria).
 Social factors cont:

• Social values refer to the way our values affect

organisations and work itself c/o employee participation
programs and the cost of technology, the prevalence of
informal groups in organisations brings about issue of
culture and sub-cultures both needing to be managed.
• Social values differ from country to country hence the
learning of foreign value is complex but nevertheless
unavoidable.(e.g. in Japan karioka (death from
overworking)is common and a worker sticks to one
employer for his entire working life.)
• We can add things such as culture, beliefs, attitudes at
different levels.
 PEST ANALYSIS CONT:

4. Technological variables.
• Consideration of fast paced developments taking place in
new products and production processes( e.g. The number
of new vehicle models, cell phones, TVs etc)
• Improved technology has potential to increase product life
span but the number of new models shortens the life span
of products-implying a lot of marketing expenditure
• Issues to do with quality and safety imply the need to
change or upgrade production processes more frequently.
• Significant improvements have been recorded in
communications and transportation areas
• Improved technology advancement has potential to gain an
organisation a lot of competitive edge.
 Direct-action factors[A.K.KA. market factors]

1. Customers.

• Customers exchange their financial value for an

organisation’s products and services.
• Customers can be individuals, institutions, government,
other firms, distributors or manufacturers.
• An organisation’s marketing strategy is shaped according
to customer type and according to market situation.
• Generally the organisation must be concerned about the
quality, availability, price of product and improved
communication and transportation to attract and retain
customers.
 Customers cont:

Customer analysis issues.

• Do you have a list and description of your customers?
• How are your customers segmented(geographically,
demographically, psychographically, or behaviourally?
• Can you confidently describe each customer segment?
• What is the process of selecting segments you want to
concentrate on or serve?
• How are your marketing programmes for each of the
selected segments developed?
• Do you have post purchase evaluation programme your
customer segments?
 Direct-action factors

2. Suppliers.
• Resources that the organisation uses such as inputs, services,
energy, equipment and labour are procured from suppliers.
• When ordering organisations focus on cost, quality, availability,
because these determine the cost of production and the selling
price.
• The power of supplier relationships becomes crucial hence the
need for efficient supply chain management(SCM) and supply
networks as well as effective inventory control systems such as just
in time(JIT).
• The aim is for the organisation to become the best cost provider
and eventually market leader or the most preferred
supplier(supplier of choice).
 Direct-action factors

3. Special interest groups(SIGs).

• SIGs, are sometimes called pressure groups – they use the political
process to further their position on particular issue, e.g. the
controversial ban on the sale of infant formulae manufactured by
NESTLE in the developing world and the recent banning of oil
imports from Iran into RSA.
• SIGs often get instant media attention and the fact that they lobby
the politicians to support their cause actually make them very
powerful,e.g. Consumerists and environmentalists.
• As a way of dealing with SIGs some organisations try to negotiate
while others counter lobby government(MPs) and corruption is
endemic in these processes but management of organisations are
expected by their principals to emerge the winners.
 Direct-action factors

4.The media.
• The public’s interest in business activities is growing because of
media coverage.
• Mass communication allows extensive, immediate and
sophisticated coverage.
• Investigative journalism has exposed bad business practices.
• Because of globalisation, organisations wherever they are located
live in a fish bowl such that every action they take is subject to
media scrutiny.
• Organisations are employing Public Relations(PR) and Marketing
specialists so that they can deal with media issues in order to limit
its potential damage but to also gain mileage from the media where
possible.
 Direct-action factors

5.Government (Qualifies in this category as a major customer to many

organisations).
• In the early days of industrialisation governments, especially the US
government adopted the doctrine of laissez-faire(it holds that
government should exert no direct effects on business, but should
limit itself to preserving laws and order, allowing the free market
to shape the economy).
• Rampant abuse of business power emerge and the government
intervenes most of the time
• The government took the role of a watch dog and regulating
organisations to protect the public interest and to ensure
adherence to free market principles but sometimes this becomes
controversial .
 Govt. Cont:

• Critiques of government intervention argue that

regulation is expensive and it inhibits free
enterprise.
• Supporters of regulation argue that deregulation
is like returning to the law of the jungle.
• Managers of organisations are expected to deal
with controversial and sometimes contradicting
industry regulations and government’s attitude
towards the protection of local industries.
 Direct-action factors

6. Trade unions.
• These are labour movements whose primary objective is to protect
the interests of the worker in his dealings with the organisation(the
employer).
• Thus,the hiring and negotiating skills of the organisation determines
the industrial relations climate of the company its success too.
• Collective bargaining(the process of negotiating and administering
agreements between labour and management covering wages,
working conditions and other aspects of the working environment
also determine whether the company succeeds without sit ins, sit
outs, picketing and strikes(industrial action).
 Direct-action factors

7. Financial institutions.
• Money is one of the resources in short supply
• In one way or the other, the organisation relies of
financial institutions for support.
• Commercial banks provide depositing and
withdrawal facilities as well as short term trade
finance.
• Investment banks are involved in raising capital,
mergers and acquisitions and in medium to long
term investments.
 Financial institutions cont:

• Building societies can fund construction projects such as factories

and warehouses.
• Insurance companies are interested in securities issues providing
cover in case of loss caused by nature or human acts(accident cover,
fire protection, embezzlement of funds e.t.c).
• Organisations must maintain good working relationships with the
financial institutions all the time in order to get good and sound
advice on time.
• But managers of financial institutions are expected to be of
unquestionable personality as slight mismanagement of customers’
money has disastrous consequences, c/o the world financial crisis,
the recent reports about Barclays scandals and both positive and
negative effects of deregulating the financial market.
 Direct-action factors cont:

8. Competitors.
• An organisation must always watch the actions of their
competitors(both current and potential).
• At the same time the organisation’s moves and
potential moves are being watched by its competitors
and potential competitors.
• Foreign competition is difficult to analyse hence it
poses more and special challenges that local
competition. (See table below which summarises
competitor analysis and customer analysis issues.)
 Competitors cont:

Competitor analysis issues

• What are the competitors ‘major objectives?
• What are the competitors ‘current strategies?
• What are the competitors ‘likely future strategies?
• How are competitors likely to react to counter
strategies?
• Do the competitors have capability to implement their
strategies?
• What technological strategies do competitors have?
 SWOT ANALYSIS FACTORS(an alternative
environmental analysis model)
Strengths.
 What are you good at?
 What new skills does your organization have?
 What can you do that others can’t?
 How can you repeat a recent success?
 What makes you unique?
 Why do your customers come to you?
Opportunities.
 Have there be any changes in your market in your favour?
 What skills could you learn?
 What new products or services could you offer?
 Which new customer groups could you reach?
 How could you make yourself unique?
 How could your organization look like in 5-10 years?
Weaknesses
 What are you not good at?
 What skills does your organization lack?
 What can others do better than you?
 What recent failures have you had? Why?
 What customer groups are you not satisfying?
 What customers have you lost recently? Why?
Threats.
 Have there been any changes in the market which
disadvantages you?
 What are your competitors up to?
 Are your customer’s needs changing against your
interests?
 Are there any economic or political changes which
can harm you?
 Is there anything which could threaten your
organization’s existence?
 INTERNAL ANALYSIS

• Key internal stakeholders are; board members,

management and employees.
• Internal environmental issues are the
responsibility of management(that is what
they are employed to manage).
• Internal environmental factors are to do with
company management issues
 Internal factors cont:

• How relevant are the company’s vision and mission,

plans and strategies
• Capacity and capability issues
• Availability of resources and appropriate structures
• Ability to achieve goals(long term, medium term and
short term)
• In the SWOT analysis model-strengths and weaknesses
are about the organisation’s internal environmental
factors.
• The rest of topics discussed in this course is more about
internal environmental issues.
 International business environmental
issues
• Communication challenges as a result of language barriers
• Import and export regime differences c/o. Corporate tax
rates differences in the region are, Botswana 15 % with a
special rate for manufacturing of 5% , Mauritius
15%,Lesotho 25% manufacturing 0%, RSA 28%, SD 30%
revised to 27.5% in 2013 Budget pronouncement and
Namibia 34% revised to 32%.
• Role of GATT, regional blocs, international protocols e.t.c
• Political differences and national conflicts that spill over to
other countries
• Developed vs developing nations
• Sustainability-exploitation of a country’s resources
• Technological and innovation gaps
 End of unit questions

1. Explain the differences between direct action

factors and indirect action factors.
2. What would you consider when you have been
asked to do an internal analysis for an organisation
that you work for.
3. Explain the SWOT analysis concept and how it
relates to PEST analysis. Is it necessary to do both at
the same time?