External Environment of an Organization: Definition & Elements

External Environment

Factors outside of an organization made up the external environment. The bank/ organization has no control over the external environment. Banks need to change or update their policy or activities to cope with changes in the external environment.

Types of external environment

The external environment can be subdivided into two categories:

1. General Environment &
2. Task / Industry Environment.

The factors of the general environment are related to the banking industry as a whole. The factors of the task environment are related to a single bank/ organization.

Elements/ Factors of General Environment

The general environment usually includes political, economic, sociocultural, technological, legal, natural, and demographic factors in a particular country or region.

Political Factors:

Political factors are related to the political system of a country. The norms and ideology of a political party in power have a large impact on the banking industry and any other industries. The country’s import policy, export policy,  taxation policy, and investment policy are largely dependent on Political Factors.

Another important issue is political stability. If the political stability remains in the country, then the business gets a good chance to expand. In that way, the banking industry can utilise funds in large volumes. As a result, a positive vibe is created in the economy. On the other hand, political instability hinders economic activities and the growth of a country.

Economic Factors

The economic factor of an organization/bank is the overall status of the economic system in which the organization/bank operates. The important economic factors are economic growth, income levels of the population, inflation rate, tax rates for individuals and business organizations, interest rates, and unemployment.

Socio-Cultural Factors

Socio-cultural forces include customs, values, traditions, social mobility, attitudes towards technology, and people’s values, opinions, beliefs, etc. The standard of business conduct varies from culture to culture, and so does the taste and necessity of products and services. So, before doing business or offering goods or services, a bank or organization should have a good knowledge of the socio-cultural factors of the area in which the organization is operating.

Technological Factors

Technological factors include information technology, the Internet, biotechnology, global transfer of technology, and so forth. Technology has major impacts on product development, manufacturing efficiencies, and potential competition. Technology is changing rapidly. So, banks/organizations should be aware af the changes and adapt to innovations.

Natural / Environmental Factors

Changes in the physical/natural environment, such as global warming, will heavily affect our daily lives and the functioning of our organizations with a variety of consequences.

Demographic Factors

The demographic environment is concerned with a country’s population. Specifically, it is related to the population’s size, age structure, geographic distribution, ethnic mix, and income distribution. In some countries, there is negative population growth, and in some countries, the rate is alarming. In general, the average age is increasing. Bank/organization must analyze the demographic issues, especially the size and growth rate of the population, age distribution, ethnic mix, educational level, household patterns, and inter-regional movements.

International Factors

Virtually every organization is affected by international factors. It refers to the degree to which an organization is involved in or affected by businesses in other countries. The concept has brought the nation together, and with the modern network of communication and transportation technology, almost every part of the world is connected. The recent war of middle east affect almost all countries in the world.

 

Elements/ Factors of Industry/Task Environment

Industry/task environment is made up of suppliers, buyers, direct competitors, new entrants, and substitutes.

Suppliers

Suppliers are the providers of production or service materials. Dealing with suppliers is an important task of management. A good relationship between the organization and the suppliers is important for an organization to keep a steady following of quality input materials. Suppliers are sources of resources such as raw materials, components, equipment, financial support, services, and office Supplies.

To ensure the long-term survival and growth of a company, it is essential to develop a dependable relationship between a business-firm and its suppliers. Concerning its competitive position with suppliers, a company should address the following questions;

• Are the suppliers’ prices competitive?
• Do suppliers offer attractive quantity discounts?
• How costly are their shipping charges?
• Are vendors competitive in terms of production standards?
• Are suppliers’ abilities, reputation, and services competitive?
• Are suppliers reciprocally dependent on the firm?

Customers & Buyers

“Satisfaction of customer”- the primary goal of every organization. The customer is the one who pays money for the organization’s product or services. They are the people who hand them the profit that the companies are targeting.

Managers should pay close attention to the customers’ dimension of the task environment because its customers purchase that keeps a company alive and sound. Strategy managers must understand the composition of the company’s customers.

With this end in view, they need to develop an exhaustive customer profile of both the present and potential customers. Managers will be in a better position to pragmatically plan the firm’s strategic operations, anticipate changes in the size of the markets and anticipate demand patterns. While constructing a customer profile, managers need to use information regarding the geographic location of customers, demographic characteristics of buyers, psychographic issues, and buyer behavior.

Competitors & New Entrants

Policies of the organization are often influenced by the competitors. Competitive marketplace companies are always trying to stay and go further ahead of their competitors. In the current world economy, competition and competitors in all respects have increased tremendously.

A firm needs to analyze the competitive intensity in the industry. It needs to understand the competitive position in the industry to improve its chances of designing winning strategies. Many companies develop a ‘competitor profile’ to more accurately forecast their short-and- long-term growth and profit/potential.

A competitor profile may include such variables as market share, product line, the effectiveness of sales distribution, price competitiveness, advertising and promotion effectiveness, location, age of the facility, production capacity, raw material costs, financial position, etc. The positive effect of this is that the customers always have options, and the overall quality of products goes high.

The new entrants are the upcoming competitors of the firm. They are potential competitors because when they enter the industry with similar types of products, the competitive intensity increases.

Regulators

Regulators are units in the task environment that have the authority to control, regulate, or influence an organization’s policies and practices. Government agencies are the main players in the environment, and interest groups are created by their members to attempt to influence organizations as well as the government. Trade unions and the Chamber of Commerce are common examples of an interest group.

Substitute Products

The producers of substitute products are indirect competitors. Substitute products serve the same categories of customers. They can meet the similar needs of customers, and therefore, emerge as threats.

For example, when the detergent powder is capable of meeting customer needs in a much better way or even in the same way as the laundry soap does, the detergent powder becomes a strong indirect competitor of the laundry soap.

Strategic Partners

They are the organization and individuals with whom the organization is in an agreement or understanding for the benefit of the organization. These strategic partners in some way influence the organization’s activities in various ways.