Types of Environment

Organizations have both an external and internal environment. Both environments consist of various dimensions and elements, which are shown in the following diagram:

Diagram: Different Types of Environment

1/ External Environment:

The external environment is everything outside an organization that might affect it. It is composed of two layers: the general environment and task environment.

A. General Environment:

The set of broad dimensions and forces in an organization’s surroundings that create its overall context. The general environment of most organizations has economic, technological, socio-cultural, political-legal, and events that have the potential to influence the organization in important ways.

Economic dimension: The economic dimension of an organization’s general environment is the overall health of the economic system in which the organization operates. Particularly important economic factors for business are inflation, interest rates, and unemployment, all of which affect demand for different products. During times of inflation, a company pays more for resources and must raise its prices to cover the higher costs. With the rise in interest rates consumers are less willing to borrow money and the company itself must pay more when it borrows. High unemployment reduces consumer’s purchasing power and thus lowers the market demand.

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 form the general environment.

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 the society is likely to value.

Political-legal dimension: The political-legal dimension of the general environment refers to government regulation of business and the general relationship between business and government, It’s important for three basic reasons. The legal system partially defines what an organization can and can’t do; pro-business or anti-business in other countries. The customs, norms, values and government rules of host country are likely to affect foreign business operation.

B. Task environment

The task environment consists of specific organizations or groups that influence an organization. The task environment includes, customers, suppliers, regulators and strategic allies or partners.

Competitors: An organization’s competitors are other organizations that compete with it for survival and growth. The most obvious resources that competitors vie for are customer dollars. Organizations may also compete for different kinds of resources like- quality labor, technological breakthroughs, patents and scarce raw materials.

Customers: A second dimension of the task environment is customers, or whoever pays money to acquire an organization’s products or services. Dealing with customers has become increasingly complex in recent years. New products and services, new methods of marketing and more discrimination customers have all add uncertainty to how businesses relate their customers.

Suppliers: Suppliers are organizations that provide resources for other organizations. It’s obvious that an organization that has strong relationship with its supplier helps to stimulate production and also pay off.

Regulators: Regulators are units in the task environment that have the potential to control, legislate or influence an organization’s policies and practices. There are two important kinds of regulators.

i) Regulatory agencies: Agencies created by the government to regulate business activities. For example- Environmental protection Agency (EPA), Occupational Safety and Health Administration (OSHA), Securities and Exchange Commission (SEC), Food & Drug Administration (FDA), Equal Employment Opportunity Commission (EEOC) etc.

ii) Interest Group: Groups formed by its own individual members to attempt to influence business. For example- National Organization for Women (NOW), Mothers Against Drunk Drivers (MADD), National Rifle Association (NRA) etc.

Strategic Allies: A final dimension of the task environment is strategic allies, which mean that an organization works together with one or more other organizations in a joint venture or under similar arrangement. Strategic alliances help companies get from other companies the expertise they lack. They also help spread risk. Managers must be careful, however, not to give away sensitive competitive information of them.

2/ Internal Environment: An organization’s internal environment consists of conditions and forces within the organization. The major elements of internal environment consist of owners, board of directors, employees, culture etc.

Owners: The owners of a business are the people who have a legal property right to that business. Owners can be a single individual who establishes and runs small business, partners who jointly own the business, individual investors who buy stock in a corporation, or company.

Board of Directors: Not all organizations have board of directors. Corporations, of course, are required to have them but non-incorporated business and many non-business organizations may go without board of directors. Board of directors may be called as board of regents, board plays a major role in helping set corporate strategy and seeing that it is implemented properly. The board also reviews all important decisions made by top management and determines compensation for top managers.

Employees: An organization’s employees are also a major element of its internal environment. When managers and employees embrace the same values and have the same goals, everyone wins. When managers and employees work toward different ends, or when conflict and hostility pervade the organization, everyone suffers.

Culture: The culture of an organization is the set of values that helps its members understand what the organization stands for, how it does things, and what it considers important. Culture is an especially important environmental concern for organizations. Managers must understand that culture is an important determinant of how well their organization will perform, culture can be determined and managed in a number of different ways.

Finally, we can say environment is an essential part of any organization’s operations. One important indicator of how well an organization deals with its environment is its level of effectiveness. Achieving organizational effectiveness is not an easy task. The key to doing so understands the environment in which the organization functions. With this understanding as a foundation, managers can then chart the `correct’ path for the organization as it positions itself in that environment.