The External Environment

The tremendous and far-reaching  changes occurring  in today’s world can be understood by defining and examining components of  the external environment.  The external organizational environment includes all elements existing outside the boundary of the organization that have the potential  to affect the organization.5 The environment includes competitors,  resources, technology, and economic conditions that influence the organiza-tion. It does not include  events so far removed from the organization that their impact is not perceived.

The organization’s  external environment  can be further conceptualized  as having  two layers—general and task environments. The general environment is the outer layer that is widely dispersed and affects organizations indirectly.  It includes social, demographic, and economic factors that influence all organizations  about equally. Increases in the infla- tion rate or the percentage of dual-career couples in the workforce are illustrative  of the organization’s general environment.  These events do not directly  change day-to-day  opera- tions, but they do affect all organizations eventually.

One impact of the environment is that as parents  become more  educated and more affluent, they place higher demands on educational toys, a  situation one company is exploiting.

The task environment is closer to the organization and includes the sectors that con-duct day-to-day transactions with the organization and directly influence its basic opera- tions and performance. This environment generally is considered to include competitors, suppliers, and customers.

The organization  also has an internal environment, which includes the elementswithin the organization’s boundaries. The internal environment is composed of current employees,  management,  and especially  corporate  culture, which defines employee behavior in the internal environment and how well the organization will adapt to the ex- ternal environment.

Exhibit 2.1 illustrates the relationship among the general, task, and internal  environ- ments. As an open system, the organization draws resources from  the external environment and releases goods and services back to it. We now will discuss the two layers of the exter- nal environment in more detail. Then we will discuss corporate culture,  the key element in the internal environment. Other aspects of the internal environment, such as structure and technology, will be covered in Parts Three and Four of this book.


The general environment  represents the outer layer of the environment. These dimensions influence the organization over time but often are not involved in day-to-day transactions with it. The dimensions of the general environment include international, technological, sociocultural, economic, and legal-political.

International. The international dimension of the external environment repre- sents events originating in foreign countries as well  as opportunities for U.S. companies in other countries. Note in Exhibit 2.1 that the international dimension represents  a context that influences all other  aspects of the external environment. The international environ- ment provides new competitors, customers, and suppliers and shapes social, technological, and economic trends, as well.

Today,  every company has to compete on a global basis. High-quality, low-priced auto- mobiles from Japan and Korea have changed the American automobile industry permanently.

In  cell phones and handhelds,  U.S.–based companies face stiff competition from Korea’s Samsung, Finland’s Nokia, and Taiwan’s High Tech Computer (HTC)   Corporation. For many U.S. companies,  such as Starbucks  and Wal-Mart,  domestic markets have become saturated, and the only potential for growth lies overseas. E-commerce organizations, too, are making international  expansion a priority. The U.S. share of worldwide  e-commerce is falling as foreign  companies  set up their own e-commerce ventures.

The most dramatic change in the interna- tional environment in recent years is the shift of economic power to China and India. To- gether,  these countries  have the population, brainpower, and dynamism to transform the twenty-first–century global economy. If things continue on the current track, analysts predict that India will overtake Germany as the world’s third-largest economy within three decades, and that China will overtake the United States as number one by mid-century. In China, per- capita income has tripled in a generation,  and leaders   are   building  the  infrastructure for decades of expansion, as reflected  in the coun- try’s hunger for raw materials. In 2005, China represented roughly 47 percent of the global cement consumption, 30 percent of coal,and 26 percent of crude steel. No one can predict the future, but it is clear that however things in India and China shake out, U.S. and other Western firms clearly have no choice but to pay attention.

The global environment  represents a complex, ever-changing,  and uneven playing field compared to the domestic environment. To remain competitive,  managers who are used to thinking only about the domestic environment must learn new rules. When operating globally, managers have to consider legal, political, sociocultural, and economic factors, not only in their home countries but in various other countries as well.  For example, the rising consumer  class in China and India plays a growing  role in setting the standards for high- tech products and services  such  as cell phones, multimedia gadgets, and wireless web services.6

Chapter 3 describes how today’s businesses are operating in an increasingly borderless world and examines in detail how the management in a global environment  differs from the management of domestic operations. Perhaps the hardest lesson for managers in the United States to learn is that they do not always know best. U.S. decision makers know little about  issues and competition in foreign countries, and many pay little attention to cultural factors, which is a sure route  to failure.

One study found that only 28 percent of surveyed executives from the United States think multi-cultural experience is important.7 U.S. arrogance is a shortcut  to failure. An observer of emerging companies in India issues a wake-up call: “Once they learn to sell at Indian prices with world quality, they can compete anywhere.”

Technological.  The technological dimension includes scientific and technolog- ical advancements in a specific industry  as well as in society at large. In recent years, this dimension  created massive changes for organizations in all industries. Twenty years ago, many organizations didn’t even use desktop computers. Today, computer networks, Inter- net access, handheld devices, videoconferencing  capabilities, cell phones, fax machines, and laptops are the minimum tools for doing business.

A new generation of handhelds  allows users to check their corporate e-mail, daily cal- endars, business contacts, and even customer orders from anywhere there’s a wireless net- work. Cell phones now can switch  seamlessly between cellular  networks and corporate WiFi connections. Some companies hand out wireless key fobs with continually updated security codes that enable employees to log on to their corporate networks and securely view data or write e-mails from any PC with a broadband connection.9

Other technological advances also will affect organizations and managers. Decoding  of the human genome could lead to revolutionary medical advances. Cloning technology and stem cell research are raising both scientific and ethical concerns. Nanotechnology,  which refers to manipulating matter at its tiniest scale, is moving from the research lab to the marketplace. Although only a few products incorporated nanoparticles in 2005, within a few years, nanotechnology could affect every industry.

General Electric is researching how nanoceramics can make turbines  more efficient. Medical researchers are looking at the potential for portable labs that offer instant analysis for everything from diabetes to HIV. Nanoparticles  could someday give us golf balls de- signed to fly straight, army fatigues that resist chemical weapons, dent-free automobiles, and super-charged fuel cells that could replace fossil-fuel  engines. Some 1,200 nanotech- nology start-ups have emerged around the world,  and smart managers at established orga- nizations  such as 3M, Dow Chemical, Samsung, NASA, Intel, Johnson & Johnson, and IBM are investing  research dollars in this technological breakthrough.

Sociocultural. The sociocultural dimension of the general environment represents the demographic characteristics as well  as the norms, customs, and values of the general population. Important sociocul- tural characteristics are geographical  distri- bution and population density, age, and ed- ucation levels. Today’s demographic profiles are the foundation of tomorrow’s workforce and consumers.   Forecasters   see increased globalization of both consumer markets and the labor supply, with increasing diversity both within  organizations  and consumer markets.11  Consider the following key de- mographic trends in the United States:

  1. The United States is experiencing the largest influx of immigrants in more than a century.  By 2050, non- Hispanic whites will make up only about half of the population, down from 74 percent in 1995 and 69 per- cent in 2004. Hispanics are expected to make up about a quarter  of the S. population.12
  2. People are staying in the workforce longer, and many members of the huge post–World  War II baby-boom generation are choosing to work well past traditional retirement age. At the same time,  the 76 million or so members  of Generation Y,which rivals the baby-boom generation in size, are beginning to flood the job market. For the first time, a significant number of organiza- tions are dealing with four generations working side-by-side.13
  1. The fastest-growing type of living arrangement is single-father households, which rose 62 percent in 10 years, even though two-parent  and single-mother  households are still much more numerous.14
  1. In an unprecedented demographic shift, married couple households have slipped from 80 percent in the 1950s to just over 50 percent in 2003. Couples with kids total just 25 percent, with the number projected to drop to 20 percent by 2010. By that year, 30 percent of homes are expected to be inhabited by someone who lives alone.

Demographic trends affect organizations in other countries just as powerfully.  Japan, Italy, and Germany are all faced with an aging workforce and customer base as a result  of years of declining birth rates. In both Italy and Japan, the proportion of people over the age of 65 reached 20 percent in 2006.16

The sociocultural  dimension  also includes societal norms and values. The low-carb craze replaced the low-fat craze, spurring restaurants to alter their menus and supermarkets to re- vise their product mix. Even the Girl Scouts were affected, as sales declined about 10 percent during the 2004 cookie season.17 Handgun  manufacturers in the United States have been tugged back and forth as public acceptance and support of guns in the home fell in the wake of tragic school shootings, then surged following terrorist attacks in the United States.

Economic. The economic dimension represents the general economic health of the country or region in which the organization operates. Consumer purchasing power, the unemployment rate, and interest rates are part of an organization’s economic environment.

Because organizations today are operating in a global environment,  the economic dimen-sion has become exceedingly complex and creates enormous uncertainty for managers. The economies of countries are tied together more closely now. For example, the economic re- cession in the early 2000s and the decline of consumer confidence in the United  States af- fected economies and organizations around the world. Similarly,  economic problems in Asia and Europe had a tremendous  impact  on companies and the stock market in the United States.

One significant trend in  the economic  environment  of late is the frequency  of mergers  and acquisitions.  Citibank and Travelers merged  to form Citigroup, IBM purchased PricewaterhouseCoopers Consulting,  and Cingular  acquired AT&T Wireless. In the toy industry, the three largest toy makers—Hasbro, Mattel, and Tyco—gobbled up at least a dozen smaller competitors  within a few years. At the same time, a tremendous vitality is evident in the small business sector of the economy. Entrepreneurial start-ups are a significant  aspect of today’s U.S. economy,  as will be discussed in Appendix A.

Legal-Political. The legal-political dimension includes government regulations at the local, state, and federal  levels, as well as political activities designed to influence company behavior. The U.S. political system encourages capitalism,  and the government tries not to overregulate business. Government  laws, however, do specify rules of the game. The federal government influences organizations through the Occupational  Safety and Health Administration (OSHA), Environmental  Protection Agency (EPA), fair trade practices, libel statutes allowing  lawsuits against business, consumer protection legislation, product safety requirements, import and export restrictions, and information  and labeling requirements.

Many organizations  also have to contend with government and legal issues in other countries. The European Union (EU) adopted environmental and consumer protection rules that are costing American  companies hundreds of millions of dollars a year. Compa- nies such as Hewlett-Packard, Ford Motor Company,  and General Electric  have to pick up the bill for recycling the products they sell in the EU, for example.18

Managers also must recognize a variety of pressure groups that  work  within the legal-political framework to influence companies to behave in socially responsible ways. Envi- ronmental  activists have targeted Victoria’s  Secret, L.L.Bean, and other companies for wasteful catalog-printing practices that the activists say contribute  to the stripping of en- dangered forests.19

Tobacco companies today are certainly feeling the far-reaching power of antismoking groups. Middle-aged  activists who once protested the Vietnam War have gone to battle to keep Wal-Mart from “destroying the quality of small-town life.” Some groups also attacked the giant retailer on environmental issues, which  likely  will be one of the strongest pressure points in coming years.20

Two of the hottest  current  issues for pressure groups that also are related to environ- mental concerns are biotechnology and world trade. Environmental and human rights pro- testers disrupted  World Trade Organization  meetings and meetings of the World Bank and the International Monetary Fund to protest a system of worldwide integration that has food, goods, people, and capital freely moving  across borders. This current international issue will be discussed in more detail in Chapter 3.


As described earlier, the task environment includes those sectors that have a direct working relationship with the organization. These include customers, competitors, suppliers, and the labor market.

Customers. People and organizations in the environment that acquire goods or ser- vices from the organization are its customers. As recipients of the organization’s output, customers are important because they determine the organization’s success. Patients are the customers of hospitals, students the customers of schools, and travelers the customers of airlines. Many companies are searching for ways to reach the coveted teen and youth market by tying marketing messages into online social networks  such as and With high school and college students  representing  a $375  billion consumer-spending market, this is serious business for managers at companies  such  as Target, Apple, Coca-Cola, and Walt Disney. Apple sponsors an Apple-lovers group on, giving away iPod Shuffles in weekly contests. Target  has sponsored a group on that features a 15-year-old  professional snowboarder wearing a Target logo on his helmet.

Customers  today have more  power  because of the Internet, which presents threats  as well  as opportunities for managers. Today’s customers can directly affect the organization’s reputation and sales, for example, through  gripe sites such as,  where  cus- tomers  and sales associates cyber-vent  about the nation’s largest retailer, and, where United Airlines employees and disgruntled  fliers rail against the air carrier.

“In this new information environment,” says Kyle Shannon, CEO of e-commerce con- sultant, “you’ve got to assume everyone knows everything.”

Competitors. Other organizations in the same industry  or type of business that pro- vide goods or services to the same set of customers are referred to as competitors.  Each industry is characterized by specific competitive issues. The recording industry differs from the steel industry and the pharmaceutical industry.

Competitive  wars are being waged worldwide  in all industries. Coke and Pepsi con- tinue to battle it out for the soft-drink market. UPS and FedEx fight the overnight deliv- ery wars. Home Depot and Lowe’s brawl in the retail home improvement market, trying to out-do one another in terms of price, service, and selection.23  In the travel and tourism industry, Internet  companies such as and have hurt the big hotel chains. These chains are fighting back by undercutting the brokers’ prices on the hotels’ own websites.  In  addition, five of  the largest chains banded together to  create, which is aimed directly at the online brokers.24 When celebrities become part of the competition, it often puts an unfair burden on other players, as shown in the Spotlight on Skills feature.

Suppliers. The raw materials the organization uses to produce its output  are provided by suppliers. A steel mill requires iron ore, machines, and financial  resources. A small, private university may utilize hundreds of suppliers for paper, pencils, cafeteria food, com- puters, trucks, fuel, electricity, and textbooks. Companies from toolmakers to construction firms and auto manufacturers were hurt in 2004 by an unanticipated jump in the price of steel from suppliers. Just as they were starting to see an upturn in their business, the cost of raw materials jumped 30 percent in a two-month  period.25

Consider also that China now produces more than 85 percent of the Vitamin C used by companies in the United States. An agreement among China’s four largest producers led to an increase in the price of Vitamin C from $3 a kilogram  to as high as $9 a kilogram.26

Many companies are using fewer suppliers and trying to build good relationships with them so they will receive high-quality parts and materials at lower prices. The relationship between manufacturers and suppliers traditionally has been an adversarial one, but manag- ers are finding that cooperation is the key to saving money, maintaining quality, and speed- ing products to market.

Labor market. The labor market represents people in the environment  who can be hired to work for the organization.  Every organization  needs a supply of trained, qualified personnel. Unions,  employee associations, and the availability  of certain classes of employees can influence the organization’s  labor market. Curent labor market forces affecting organizations include (1) the growing need for computer-literate knowledge workers; (2) the necessity for continuous investment in human resources through recruitment, education, and training to meet the competitive  demands of the borderless world; and (3) the effects of international  trading blocs, automation, outsourcing, and shifting facility location upon labor dislocations, which creates unused labor pools in some areas and labor shortages in others.

Changes in these various sectors of the general and task environments  can give rise to tremendous challenges, especially for organizations operating in complex, rapidly changing industries. Nortel Networks, a Canadian company with multiple U.S. offices, is an example of an organization operating in a highly  complex environment.

Nortel Networks. The external environment for Nortel Networks is illustrated in Exhibit 2.2. The Canadian-based company began in 1895  as a manufacturer of telephones and has reinvented itself many times to keep up with changes in the environment. In the late 1990s, the company transformed itself into a major player in wireless technology and equipment for connecting businesses and individuals to the Internet. In 1997, the com- pany was about to be run over by rivals,  such as Cisco  Systems, who were focused on Internet gear. Then-CEO John Roth knew he had to do something bold to respond to changes in the technological environment. A name change to Nortel Networks symbol- ized and reinforced the company’s new goal of providing unified network solutions to customers worldwide.

One response to the competitive  environment  was to spend billions of dollars to ac- quire data and voice networking companies, including Bay Networks (which makes Internet and data equipment),  Cambrian  Systems (a hot maker of optical technology), Periphonics  (maker of voice-response  systems),  and Clarify (customer  relationship management software). These companies brought Nortel top-notch technology, helping the company snatch customers away from rivals Cisco and Lucent Technologies. In ad- dition, even during  rough economic times, Nortel kept spending nearly 20 percent of its revenues on research and development  to keep pace with changing technology.

Internationally,  Nortel made impressive  inroads in Taiwan, China, Brazil, Mexico, Colombia, Japan, and Sweden, among other countries. It also won customers by recognizing the continuing  need for traditional equipment and offering hybrid gear that combines old telephone technology with new Internet  features, allowing  companies to make the transition from the old to the new. Bold new technologies for Nortel include optical systems that move voice and data at the speed of light and third-generation wireless networks (3G), which zap data and video from phone to phone. Nortel is considered  a leader in wireless gear and won contracts from Verizon Communications and Orange SA, a unit of France Telecom, to supply equipment that sends phone  calls as packets  of digital  data like that used over the Internet.

Companies moving in a Net-speed environment risk a hard landing, and when the de-mand for Internet equipment slumped in the early 2000s, Nortel’s  business was devas- tated. The company cut more than two-thirds of its workforce  and closed dozens of plants and offices. An accounting  scandal that led to fraud investigations and senior executive dismissals made things even worse. At one point, Nortel’s stock was trading for less than a dollar. By early 2006, though,  positive changes in the economic environment, along with a savvy new CEO, put Nortel back on an uphill swing. Analysts predicted that the com- pany would outdo major competitor Lucent in sales growth and other financial metrics. As one analyst said, however, “It’s a tough business,” and Nortel’s  managers have to stay on their toes to help the organization cope in an ever-changing, difficult environment.

Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.

1 thoughts on “The External Environment

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