Organizational Environment

In today’s constant changing environment, all organizations face tremendous uncertainty in dealing with events in the external environment.

The giant packaged food companies such as General MillsOpens in new window, Kraft HeinzOpens in new window, and Kellogg'sOpens in new window, for example, are seeing their market share decline as consumers increasingly turn to fresh foods and more natural and organic choices.

Cybercrime, such as recent data breaches at Dunkin DonutsOpens in new window, Under ArmourOpens in new window, Rush University Medical SystemOpens in new window, and Georgia Institute of Technology (Georgia Tech)Opens in new window, is a growing threat from the environment to every organization.

Most organizations at some point have to adapt quickly to new competition, economic turmoil, changes in consumer interests, or innovative technologies.

The crucial point is that changes in the environment can create threats and opportunities for organizations.

Assessing the Organization and Its Environment

In a broad sense the environment is infinite and includes everything outside the organization. However, the analysis presented here considers only those aspects of the environment to which the organization is sensitive and must respond to survive.

Thus, organizational environment is defined as everything that exists outside the boundary of the organization and has the potential to affect all or part of the organization.

The environment of an organization can be understood by analyzing its domain within external sectors.

An organization’s domain is the chosen environmental field of action. It is the territory an organization stakes out for itself with respect to products, services, and markets served.

Domain defines the organization’s niche and defines those external sectors with which the organization will interact to accomplish its goals.

The environment comprises several sectors or subdivisions that contain similar elements. Eleven sectors can be analyzed for each organization:

industry,
raw materials,
human resources,
financial resources,
market,
technology,
economic conditions,
government,
natural,
sociocultural, and
international.

The sectors and a hypothetical organizational domain are illustrated in Figure X-1.

Figure X-1 An Organization's Environment

For most companies, the sectors in Figure X-1 can be further categorized as either the task environment or the general environment.

Task Environment

The task environment includes sectors with which the organization interacts directly and that have a direct impact on the organization’s ability to achieve its goals.

The task environment typically includes the industry, raw materials, and market sectors, and perhaps the human resources and international sectors.

The following examples illustrate how each of these sectors can affect organizations:

Industry sector

In the industry sector, the retail industry in South Korea has always been dominated by big department stores, but as smartphone use surged in the country over the past few years, companies saw new ways to reach consumers.

South Korea has a low number of women in the workforce, so there is a ready audience of affluent television and Internet shoppers. Online and home shopping competitors are growing in popularity, and posters on subway station walls allow people to make purchases simply by snapping a picture of a barcode.

Raw materials sector

In the raw materials sector, sales growth at Adidas slowed in early 2019 because the company’s suppliers in Asia were having trouble keeping pace with the fast growth as AdidasOpens in new window shifted more production from high-end products to mid-priced clothing.

As another example, Tyson FoodsOpens in new window invested hundreds of millions of dollars to build 90 chicken farms in China to guarantee a supply of high-quality birds, which the company then processes and sells to fast food companies, wholesalers, and other meatpackers in the country that use the meat in sausage and other products.

Market sector

In the market sector, executives at Univision Communications Inc.’sOpens in new window flagship Spanish-language television network are working to adapt programming to appeal to younger and U.S. born Hispanics.

Nearly 60 percent of Hispanics in the United States are Millennials or younger, so managers know it is essential to add edgier, more fast-paced programs that interest this large segment of the market.

Human resources sector

The human resources sector is of significant concern to every business. A tight labor market is affecting organizations in all industries.

Even the FBI is having trouble finding enough qualified candidates for the 900 or so special agent positions that open each year. The agency received 68,500 applications in 2009 for the coveted positions, but that number was down to 11,500 in the year ending September 2018. Officials say it takes about 16,000 applicants to get a healthy pool of candidates to fill the special agent jobs.

International sector

For most companies today, the international sector is also a part of the task environment because of globalization and intense competition. For example, thousands of products were removed from Amazon.com’s India website in early 2019 after that country’s new e-commerce rules went into effect.

The new restrictions are aimed at helping local retailers better compete against foreign owned giants such as Amazon. The rules could affect as much as 40 percent of Amazon’s sales in India.

General Environment

The general environment includes those sectors that might not have a direct impact on the daily operations of a firm but will indirectly influence it.

The general environment often includes the government, natural, sociocultural, economic conditions, technology, and financial resources sectors. These sectors affect all organizations eventually. Consider the following examples:

Government sector

In the government sector, regulations influence every phase of organizational life. In addition, companies often find themselves fighting legal battles in local or national courts.

Johnson & JohnsonOpens in new window, for example, has at some point faced series of lawsuits over the safety of its baby powder.

Natural sector

The natural sector of the external environment, including all elements that occur naturally on Earth, is of growing importance as consumers, organizations, and managers become increasingly sensitive to diminishing natural resources and the environmental impact of a company’s producrts and business practices.

Caesars EntertainmentOpens in new window, one of the world’s largest gaming companies, created a scorecard to keep track of how well the company was doing at reducing energy consumption, recycling waste, and meeting other “green” goals.

Managers found that the more information guests had about Caesars’ environment practices, the better they felt about the company and the more likely they were to enjoy their stay at the casino and to book future visits. Protection of the natural environment is also emerging as a critical policy focus around the world.

Sociocultural sector

One significant element in the sociocultural sector is pressure from various advocacy groups.

An amusing example comes from NabiscoOpens in new window and its parent company Mondelez InternationalOpens in new window, where managers decided under pressure from People for the Ethical Treatment of Animals (PETA)Opens in new window to let the animals on its circus-themed Barnum’s Animal Crackers boxesOpens in new window (caged for more than a century) roam free.

The box now shows a zebra, gorilla, elephant, lion, and giraffe wandering side by side rather than captured behind bars. “Big victories can come in small packages,” PETA’s websiteOpens in new window proclaimed about the package redesign. “The new box … perfectly reflects that our society no longer tolerates caging and chaining exotic animals for circus shows.

Economic conditions

General economic conditions often affect the way a company must do business. Looking back, the global recessionOpens in new window that began in 2008 affected companies in all industries.

For example, Briggs Inc.Opens in new window, a small New York City company that plans customized events for corporations wanting to woo top clients or reward staff or client loyalty, had to make some changes when it began losing customers.

BriggsOpens in new window began looking for ways to save clients money, such as moving events to smaller venues, scaling down décor, and adding extras that didn’t add to the cost. The strategy was a financial burden for Briggs, but it helped the company hold onto clients for the long term.

Technology sector

The technology sector is an area in which massive changes continue to occur because of the rise in artificial intelligence (AI)Opens in new window and digital technologiesOpens in new window. In countries from the United States to Canada to Japan, studies have found substantial drops in white-collar jobs linked to adoption of new technology.

Today, AI software is picking out worrisome spots on medical scans, spotting profits in stock trades in milliseconds, sifting through documents for evidence in court cases, and recording power usage beamed from digital utility meters in millions of homes.

Yet technology also can create jobs in new areas. Several companies are working on technology for driverless cars. WaymoOpens in new window launched Waymo OneOpens in new window, the country’s first commercial ride-share service using self-driving cars, for limited service in late 2018.

Financial resources

All businesses have to be concerned with financial resources, and this sector is often first and foremost in the minds of entrepreneurs.

Many small business owners turned to online person-to-person (P-to-P) lending networks for small loans because of bank’s tight lending standards. Jeff Walsh, for example, borrowed around $22,000 through Prosper.comOpens in new window for his coin laundry business.

Alex Kalempa needed $15,000 to expand his business of developing racing shift systems for motorcycles, but ranks offered him credit lines of only $500 to $1,000. Kalempa went to LendingClub.comOpens in new window, where he got the $15,000 loan at an interest rate several points lower than the banks were offering.

International Environment

The international sector can directly affect many organizations, and it has become extremely important in the last few years. The auto industry, for example, has experienced profound shifts as China emerged as the world’s largest auto market.

In response, some car makers have moved international headquarters into China and have been designing features that appeal to the Chinese market, including bigger, limousine-like back seats, advanced entertainment systems, and light-colored interiors. Ride-sharing service UberOpens in new window was also hoping to rap into China’s huge market, but eventually sold its business in that country to Chinese-owned Didi Chuxing.

Uber and Didi Chuxing as Practical Example
Many people in the United States might think Uber is the king of ride-hailing services, but Chinese entrepreneur Cheng Wei would argue that title belongs to his startup firm Didi Chuxing (formely Didi Kuaidi). Didi is the largest ride-hailing app in the world. Uber had bold ambitions to conquer the Chinese ride-sharing market. Managers made frequent trips to China to develop political relationships and build an extensive network of drivers in the country. But they found the complexity of China too tough to crack. As Jeff Immelt, former CEO of General Electric, once said about entering the Chinese market, “China is big, but it is hard.” Uber’s managers needed to overcome numerous obstacles—different banking and financial systems, complex political and legal systems, frustrating rules and regulations, and puzzling cultural differences. After two years operating in China and racking up more than $2 billion in losses, managers agreed to sell Uber’s Chinese business to Didi Chuxing.

Uber and Didi Chuxing as Practical Example

Many people in the United States might think Uber is the king of ride-hailing services, but Chinese entrepreneur Cheng Wei would argue that title belongs to his startup firm Didi Chuxing (formely Didi Kuaidi). Didi is the largest ride-hailing app in the world.

Uber had bold ambitions to conquer the Chinese ride-sharing market. Managers made frequent trips to China to develop political relationships and build an extensive network of drivers in the country. But they found the complexity of China too tough to crack. As Jeff Immelt, former CEO of General Electric, once said about entering the Chinese market, “China is big, but it is hard.” Uber’s managers needed to overcome numerous obstacles—different banking and financial systems, complex political and legal systems, frustrating rules and regulations, and puzzling cultural differences. After two years operating in China and racking up more than $2 billion in losses, managers agreed to sell Uber’s Chinese business to Didi Chuxing.

Every company faces tremendous uncertainty when it enters an international market. International events can also influence all the domestic sectors of the environment.

For example, adverse weather and a workers’ strike in Western Africa, which supplies about two-thirds of the world’s cocoa beans, sharply increased raw material costs for Choco-Logo, a small maker of gourmet chocolates in Buffalo, New York.

Countries and organizations around the world are connected as never before, and economic, political, and sociocultural changes in one part of the world eventually affect other areas.

All organizations have to adapt to both subtle and massive shifts in the environment. In the next entry, we discuss in greater detail how companies can cope with and respond to environmental complexity and dynamism.

Remember This!
Organizations are open social systems. Most are involved with hundreds of elements in the external environment, and the environment can be incredibly complex. Changes in an organization’s environment create both threats and opportunities. The environment of an organization can be understood by analyzing the organization’s domain, which defines those external sectors with which the organization will interact to accomplish its goals. Sectors of the task environment include the industry, raw materials, market, human resources, and international. Sectors of the general environment include government, natural, sociocultural, economic conditions, technology, and financial resources.

Remember This!

Organizations are open social systems. Most are involved with hundreds of elements in the external environment, and the environment can be incredibly complex.
Changes in an organization’s environment create both threats and opportunities. The environment of an organization can be understood by analyzing the organization’s domain, which defines those external sectors with which the organization will interact to accomplish its goals.
Sectors of the task environment include the industry, raw materials, market, human resources, and international. Sectors of the general environment include government, natural, sociocultural, economic conditions, technology, and financial resources.

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