The world at large forms the external environment for businesses. A firm must confront, adapt to, take advantage of, and defend itself against what is happening in the world around it to succeed. To make gathering and interpreting information about the external environment easier, strategic analysts have defined several general categories of activities and groups that managers should examine and understand. Organizations and industries are again at a crossroads when confronting new and challenging external environmental demands. Exceptional companies frequently exemplify evolving business models that combine strategic innovation, technological prowess, and organizational cultural agility that not only meet external environmental demands, but also shape them.
Many businesses with traditional business models, however, have failed or are not succeeding strategically, operationally, and organizationally by not realizing and/or adapting to changing external environments. Such firms that were once successful but did not anticipate and then adapt to such changes include Blockbuster, Toys R Us, Borders, Sun Microsystems, Polaroid, and Kodak, to name only a few.
A sample of contemporary external environmental trends and forces that currently challenge organizations’ survival and effectiveness includes:
Digital technologies and artificial intelligence (AI)
Extensions of AI help automate a firm’s value chain, thus speeding up and increasing efficient operations and service to customers. A current survey showed that 59% of organizations are collecting information to develop AI strategies, while others are moving forward in piloting and/or adopting AI solutions to compete faster and at less cost.1Panetta, Kasey, “Gartner Top 10 Strategic Technology Trends for 2018”, Gartner, October 3, 2017. However, there are also risks that accompany firms that incorporate new digital and online technologies without adequate security measures. For example, some newer online technologies can expose operational systems to cyberattacks and large-scale manipulation. Hacking is now both an illegal and ongoing “profession” for those who are able to paralyze organizations from accessing their data unless they pay a ransom. While hacking is not new, it is more widespread and lethal. Still, the future of most businesses is using some type of digital and AI technologies.
The advent of blockchain technologies that are interrupting new industry practices
Blockchain is not a single technology; it is “an architecture that allows disparate users to make transactions and then creates an unchangeable record of those transactions.” It is “a public electronic ledger—similar to a relational database—that can be openly shared among disparate users and that creates an unchangeable record of their transactions, each one time-stamped and linked to the previous one.”2Mearian, Lucas, “What is blockchain? The most disruptive technology in decades”, Computerworld, May 31, 2018. These technological inventions will continue to affect almost every business process from procurement to legal management. The banking industry is already using it. It increases speed, security, and accuracy of transactions.
Sharing-economy cultural and economic value-added business models that use information technologies to gain competitive advantage
Companies such as Airbnb and Uber have ushered in new business models that have already disrupted real estate, hotel, taxi, and other industries. Taking out the middle layer of management in transactions to increase efficiencies and customer satisfaction while cutting costs through the use of information and social media technologies will continue. This trend has already had both positive and disruptive effects on companies. Many customers are likely benefitted; businesses with outdated and ineffective business models have either failed or struggle to adapt.
Shifts in learning and learning credentials
Identifying, recruiting, and retaining talent is crucial to organizations. An evolving crisis for the current generation—future talent—is the continued rise in higher educational institutions’ tuitions, student debt, and the changing nature of jobs. With the advent of online resources, prospective students’ inability to pay creates both a crisis and opportunity for traditional higher educational institutions. While bachelor’s degrees remain a requirement for many companies hiring needed higher-level talent, online resources such as Khan Academy, Udacity, and Coursera are gaining recognition and legitimacy toward providing financially challenged students opportunities for entry-level jobs. While many higher-skilled students and professionals may not presently be included in this trend, companies seeking to pay lower wages while offering flexible working conditions are attracting students.3Young Entrepreneurship Council, “23 Trends That Will Shake the Business World in 2018”, Forbes, January 10, 2018. Again, how higher educational private, not-for-profit, and even for-profit educational institutions adapt, innovate, and manage their external environments is yet to be seen.
Ethics, corporate social responsibility (CSR), and sustainability
Corruption, lying, and fraud have been and continue to be part of the landscape of governments and public- and private-sector corporations. However, public awareness through social and online media has awakened consumers and corporations to the impending dangers and drawbacks of illegal and unethical activities of certain large corporations. And external environmental problems, created in part by humans, such as pollution and climate change pressure companies to be responsible for their share of the costs associated with these problems.
This small sample of powerful external forces illustrates the continuing pressure companies encounter to innovate in their industries. Basic theories, concepts, and principles are presented in this chapter to help explain elements of external environments and how organizations and corporations can organize and are organizing to survive and thrive in the 21st century.
To succeed and thrive, organizations must adapt, exploit, and fit with the forces in their external environments. While the type, size, scope, location, purpose, and mission of an organization all help determine the external environment in which it operates, it still must meet the requirements and contingencies of that environment to survive and prosper. Understanding how organizations fit with their external environments and how organizations are structured to meet challenges and opportunities of these environments is a critical skill for all modern managers.
The big picture of an organization’s external environment is an inclusive concept that involves all outside factors and influences that impact the operation of a business that an organization must respond or react to in order to maintain its flow of operations.4This is a broad definition which has been used in different forms. The source here is “What is an External Environment in Business” Chapter 5, study.com, Accessed October 15, 2018. The types of general macro environments and forces that are interrelated and affect organizations include: sociocultural, technological, economic, government and political, natural disasters, and human-induced problems that affect industries and organizations. For example, economic environmental forces generally include such elements in the economy as exchange rates and wages, employment statistics, and related factors such as inflation, recessions, and other shocks—negative and positive. Hiring and unemployment, employee benefits, factors affecting organizational operating costs, revenues, and profits are affected by global, national, regional, and local economies. Other factors discussed here that interact with economic forces include politics and governmental policies, international wars, natural disasters, technological inventions, and sociocultural forces. It is important to keep these dimensions in mind when studying organizations since many if not most or all changes that affect organizations originate from one or more of these sources—many of which are interrelated.
Globalization is a combination of external forces shaping environments of organizations. Defined as the development of an integrated global economy and characterized by free trade, capital flows, communications, and cheaper foreign labor markets, the processes of globalization underlie the forces in the general international economic environment. This dimension continues to present opportunities and pressures to companies operating locally as well as globally. Globalization continues to affect industries and companies in ways that benefit some and not others. Amazon, for example, is thriving. The firm sells low-end products through its brand AmazonBasics. The company has individual retail websites for the United States, the United Kingdom and Ireland, France, Canada, Germany, Italy, Spain, the Netherlands, Australia, Brazil, Japan, China, India, and Mexico. Uber and Airbnb represent some of the larger sharing-economy companies that operate internationally and have to date prospered in the so-called new but fragmenting global economy.
In general, countries that have gained from globalization include Japan, South Korea, Taiwan, Malaysia, Singapore, Hong Kong, Thailand, and China. China’s markets and growing economic prowess have particularly been noticed. China’s GDP (gross domestic product) is estimated at $13.2 trillion in 2018, outpacing the $12.8 trillion combined total of the 19 countries that use the euro.5Jamrisko, Michelle, “China’s Economy to Overtake Euro Zone This Year”, Bloomberg, March 6, 2018. Corporations worldwide, large and small, online and land-based, strive to gain access to sell in China’s vast markets.
Economic forces
Economically, “The strategic challenge of the next decade is navigating a world that is simultaneously integrating and fragmenting. Stock markets have set new records and economic volatility has fallen to historic lows, while political shocks on a scale unseen for generations have taken place. Seemingly contradictory realities do co-exist.”6Rawlinson, Paul, “A prediction for globalization in 2018”, World Economic Forum, January 22, 2018. Overall, while economic data indicates that globalization has had a positive effect on the world economy, a dark side also shows that two-thirds of all households in 25 advanced-economy countries had incomes stagnate and/or decline between 2005 and 2014. Moreover, the U.K. and U.S. witnessed falling wages. Wealth distribution in these countries continues to decline. Income inequality globally is also rising.
Technological forces are another ubiquitous environmental influence on organizations. Speed, price, service, and quality of products and services are dimensions of organizations’ competitive advantage in this era. Information technologies and social media powered by the Internet and used by sharing-economy companies such as Airbnb and Uber have democratized and increased, if not leveled, competition across several industries, such as taxis, real estate rentals, and hospitality services. Companies across industry sectors cannot survive without using the Internet, social media, and sophisticated software in R&D (research and development), operations, marketing, finance, and sales. To manage and use big data in all these functional areas, organizations rely on technology.
Government and political forces also affect industries and organizations. Recent events that have jarred the global economy—and are too early to predict the long-term outcomes of—are the United Kingdom’s exit from the European Union, President Trump’s nationalistic policies,7Bersin, Josh and Mazor, Art, “Culture Engagement and Beyond”, Deloitte Insights, February 28, 2017. wars in the Middle East, policies that question and disrupt free trade, health-care reform, and immigration—all of which increase uncertainty for businesses while creating opportunities for some industries and instability in others.
Sociocultural forces
Sociocultural environmental forces include different generations’ values, beliefs, attitudes, customs and traditions, habits, and lifestyles. More specifically, other aspects of societal cultures are education, language, religion, law, politics, and social organizations. The Millennial workforce, for example, generally seeks work that engages and interests them. Members of this generation are also health conscious and eager to learn. Since this and the newer generation (Generation Z) are adept and accustomed to using technology—social media in particular—organizations must be ready and equipped to provide wellness, interesting, and a variety of learning and work experiences to attract and retain new talent. Millennials are also estimated to be the United States’ largest living adult generation. This generation numbered about 71 million compared with 74 million Baby Boomers (ages 52 to 70) in 2016. By 2019, an estimated 73 million Millennials and 72 million Boomers were projected. Because of immigration, Millennials are estimated to increase until 2036.8Cilluffo, Anthony and Cohen, D’Vera, “10 demographic trends shaping the U. S. and the World in 2017”, Pew Research Center, April 27, 2017.
Other general sociocultural trends occurring in the United States and internationally that affect organizations include the following:
- Sexual harassment at work in the era of #MeToo has pressured organizations to be more transparent about relationships between owners, bosses, and employees. Related to this trend, some surveys show new difficulties for men in workplace interactions and little effect on women’s career opportunities taking place in the short term.9Graf, Nikki, Sexual Harassment at work in the Era of #MeToo”, Pew Research Center, April 4, 2018. http://www.pewsocialtrends.org/2018/04/04/sexual-harassment-at-work-in-the-era-of-metoo/
- While fewer immigrants have been entering the United States in recent years, diversity in the U.S. workplace continues. For example, 20 million Asian Americans trace their roots to over 20 countries in East and Southeast Asia and the Indian subcontinent—“each with unique histories, cultures, languages and other characteristics. The 19 largest origin groups together account for 94% of the total Asian population in the U.S.”10The Global Risks Report 2018 13th Edition. (2018). The World Economic Forum,
- Young adults in the United States are living at home longer. “In 2016, 15% of 25- to 35-year-old Millennials were living in their parents’ home. This is 5 percentage points higher than the share of Generation Xers who lived in their parents’ home in 2000 when they were the same age (10%), and nearly double the share of the Silent Generation who lived at home in 1964 (8%).”11Fry, Richard, “It’s becoming more common for young adults to live at home for longer stretches”, Pew Research Center, May 5, 2017.
- While women have made gains in the workplace, they still comprise a small share of top leadership jobs—across politics and government, academia, the nonprofit sector, and business. Women comprised only about 10% of CEOs (chief executive officers), CFOs (chief financial officers), and the next three highest-paid executives in U.S. companies in 2016–17.12DeSilver, Drew, “Women scarce at the top of U.S. business- and in the job that lead there”, Pew Research Center, April 30, 2018. A 2018 study by McKinsey & Company “reaffirms the global relevance of the link between diversity—defined as a greater proportion of women and a more mixed ethnic and cultural composition in the leadership of large companies—and company financial outperformance.”13Hunt, Vivian et al, “Delivering Through Diversity”, McKinsey, January 2018. These and other related sociocultural trends impact organizational cultures and other dimensions involving human talent and diverse workforces.
Natural disasters and environmentalevents
Natural disaster and environmental events include high-impact hurricanes, earthquakes, floods, extreme temperatures, droughts and water shortages.
Management 2020 text remixed from multiple sources under a CC Attribution-NonCommercial-ShareAlike 4.0 International License. View a complete list of original sources.
