Managers Need for Understanding Internal and External Environment

It is important for managers to understand this aspect of the business environment because it can affect their firm and how it should be run. No business is insulated from the outside environment.  Things like political decisions, for example, can have a huge impact on a firm by changing tax laws or regulatory regimes. As another example, the managers must be aware of things like new competitors entering their market.  Clearly, managers would need to be aware of these sorts of changes.

A Manager is the person responsible for planning and directing the work of a group of individuals, monitoring their work, and taking corrective action when necessary. For many people, this is their first step into a management career.

Managers may direct workers directly or they may direct several supervisors who direct the workers. The manager must be familiar with the work of all the groups he/she supervises, but does not need to be the best in any or all of the areas. It is more important for the manager to know how to manage the workers than to know how to do their work well.

A manager may have the power to hire or fire employees or to promote them. In larger companies, a manager may only recommends such action to the next level of management. The manager has the authority to change the work assignments of team members.

One of management main task is to keep the company alive and as resilient as possible. Understanding external environmental components are key to survive. What if a heavy rain is coming down and the sewage cannot handle it. It could mean that operations are forced to stop due to lack of energy or other water problems. If management takes these external environmental components into account, it will certainly enhance it’s ability to continue or to start up as quickly as possible. In this way, operations can continue and the company stays focused on their core activities.  And if they enlarge this thinking also for the well being of their employees, than they are truly building resilient and sustainable surroundings.

1. Internal Environment of Organization

Forces or conditions or surroundings within the boundary of the organization are the elements of the internal environment of the organization.

The internal environment generally consists of those elements that exist within or inside the organization such as physical resources, financial resources, human resources, information resources, technological resources, organization’s goodwill, corporate culture and the like.

The internal environment includes everything within the boundaries of the organization.

Some of these are tangible, such as the physical facilities, the plant capacity technology, proprietary technology or know-how; some are intangible, such as information processing and communication capabilities, reward and task structure, performance expectations, power structure management capability and dynamics of the organization’s culture.

Based on those resources, the organization can create and deliver value to the customer. This value is fundamental to defining the organization’s purpose, and the premise on which it seeks to be profitable.

Are we adding value by research and development or by customer service, or by prompt delivery or by cutting any intermediary which reduces the customers’ costs?

Organizations build capabilities over a long time. They consistently invest in some areas so that they can build strong competitive businesses based on the uniqueness they have created.

The manager’s response to the external environment would depend upon the availability and the configuration of resource deployment within the organization.

The deployment of resources is a key managerial responsibility.

Top management is vested with the responsibility of allocating resources between the ongoing operations/activities and also with future operations which are of strategic nature, that is they might yield returns in some future time which require resources now to be nurtured and have some associated risks. The top management has to balance the conflicting demands of both as resources are always finite.

For example, General Electric is an aggressive innovator and marketer who has been ruthless in its approach to changing proactively as well as reactively to sustain its competitive positions in the respective industries. This implies that over the years General Electric has invested in developing those capabilities, systems, and processes that enable it to respond.

Elements of internal environment are

• Owners and Shareholders.
• Board of Directors.
• Employees
• Organizational Culture.
• Resources of the Organization.
• Organization’s image/goodwill.

The internal environment consists mainly of the organization’s owners, the board of directors, employees and culture.

(i) Owners and Shareholders

Owners are people who invested in the company and have property rights and claims on the organization. Owners can be an individual or group of persons who started the company; or who bought a share of the company in the share market.

They have the right to change the company’s policy at any time.

Owners of an organization may be an individual in the case of sole proprietorship business, partners in a partnership firm, shareholders or stockholders in a limited company or members in a cooperative society. In public enterprises, the government of the country is the owner.

Whoever the owners, they are an integral part of the organization’s internal environment. Owners play an important role in influencing the affairs of the business. This is the reason why managers should take more care of the owners of their organizations.

(ii) Board of Directors

The board of directors is the governing body of the company who is elected by stockholders, and they are given the responsibility for overseeing a firm’s top managers such as the general manager.

(iii) Employees

Employees or the workforce, the most important element of an organization’s internal environment, which performs the tasks of the administration. Individual employees and also the labor unions they join are important parts of the internal environment.

If managed properly they can positively change the organization’s policy. But ill-management of the workforce could lead to a catastrophic situation for the company.

(iv) Organizational Culture

Organizational culture is the collective behavior of members of an organization and the values, visions, beliefs, habits that they attach to their actions.

An organization’s culture plays a major role in shaping its success because the culture is an important determinant of how well their organization will perform.

As the foundation of the organization’s internal environment, it plays a major role in shaping managerial behavior.

An organization’s culture is viewed as the foundation of its internal environment. Organizational culture (or corporate culture) significantly influences employee behavior.

Culture is important to every employee including managers who work in the organization.

A strong culture helps a firm achieve its goals better than a firm having a weak culture. Culture in an organization develops and ‘blossoms’ over many years, starting from the practices of the founder(s).

Since culture is an important internal environmental concern for an organization, managers need to understand its influence on organizational activities.

(v) Resources of the Organization

An organization s resources can be discussed under five broad heads: physical resources, human resources; financial resources, informational resources, and technological resources. Physical resources include land and buildings, warehouses, all kinds of materials, equipment and machinery.

Examples are office buildings, computers, furniture, fans, and air conditioners.

Human resources include all employees of the organization from the top level to the lowest level of the organization. Examples are teachers in a university, marketing executives in a manufacturing company, and manual workers in a factory.

Financial resources include capital used for financing the operations of the organization including working capital. Examples are investment by owners, profits, reserve funds, and revenues received out of a sale. Informational resources encompass ‘usable data needed to make effective decisions.

Examples are sales forecasts, price lists from suppliers, market-related data, employee profile, and production reports.

(vi) Organization’s image/goodwill

The reputation of an organization is a very valuable intangible asset. High reputation or goodwill develops a favorable image of the organization in the minds of the public (so to say, in the minds of the customers).

‘No- reputation’ cannot create any positive image. A negative image destroys the organization’s efforts to attract customers in a competitive world.

The internal environment of an organization consists of the conditions and forces that exist within the organization.

Internal environment {sometimes called micro-environment) portrays an organization’s ‘in-house’ situations.

An organization has full control over these situations. Unlike the external environment, firms can directly control the internal environment.

Internal environment includes various internal factors of the organization such as resources, owners/shareholders, a board of directors, employees and trade union, goodwill, and corporate culture. These factors are detailed out below.

2. External Environment of Organization: Factors Outside of Organization’s Scope

Factors outside or organization are the elements of the external environment. The organization has no control over how the external environment elements will shape up.

The external environment embraces all general environmental factors and an organization’s specific industry-related factors. The general environmental factors include those factors that are common ir\ nature and generally affect all organizations.

Because of their general nature, an individual organization alone may not be able to substantially control their influence on its business operations.

Managers have to continuously read signals from the external environment to spot emerging opportunities and threats. The external environment presents opportunities for growth leadership, and market dominance, it also poses the threat of obsolescence for products, technology, and markets.

While one section of an organization faces opportunities, another faces threats from a similar environment, perhaps because there is differentiation in their respective resources, capabilities and entrenched positions within the industry.

For example, the burgeoning mobile telephone market in India provides enormous opportunities for different types of organizations from handset manufacturers, content developers, application developers, mobile signal tower manufacturers, to service providers.

At the same time, it poses a threat to the fixed-line telephone business which for a long time, has been the monopoly of public sector enterprises.

The increasing demand for telecommunication services in India post-deregulation was an enormous opportunity for early entrants to enter the telecom services business and compete for revenue with state-owned organizations.

At the same time, the growing demand for mobile services led to an expansion of industrial capacity, price wars, lowering of call tariffs, acquisitions, and declining industry profits.

India has one of the lowest call rates in the world. As the industry matured and consolidation took place, the old players had to alter their business models and strategies.

The external environment can be subdivided into 2 layers

• General Environment
• Task / Industry Environment