Organizational Context (Environment)

The environment is the surroundings or conditions in which a person, animal, or plant lives or operates. Now when we place that in an organizational context, environment basically means the surroundings or conditions in which a business operates. There is an internal environment as well as the external environment that can be further sub-divided into a micro and macro point of view.

It is important to understand the business environment so that you make sure you do not lose out to any newcomers or new products that is set to change the entire market. We see many examples such as Nokia vs Apple, MySpace vs Facebook, MSN vs Skype and many more. In each of these examples, the former lost out to the latter due to multiple factors that the latter had and the former chose to ignore initially only to bite them back harder.

In the internal environment, there are a number of aspects, namely,

•      Structure

•      Objectives

•      Culture

•      Technology

•      Leadership

•      Finance

•      People

Essentially, these are the conditions, entities, events and factors within an organization that influences its activities and choices, particularly the behavior of the employees.

Lets go on to the external environment.

Micro – PORTER’S FIVE FORCES

Macro - PESTle

In the Micro perspective, we can look at Porter’s 5 forces, which is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you're considering moving into. The collective strength of the 5 forces determines industry profitability.

The 5 forces are as follows:

·      Bargaining power of suppliers

·      Threats of substitute products

·      Bargaining power of buyers

·      Threats of new entrants

·      Intensity of rivalry within the industry

To better explain each of these points, I will be giving examples based on the railway industry.

The bargaining power of suppliers refers to how easily can suppliers of your product affect you. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. In the railway industry, supplier power in higher as it highly dependable on companies that maintain railway tracks and its staff, without whom it cannot run.

Threats of substitutes refer to how easily consumers can find an alternative way of doing what you do. For example, planes and buses can be seen as substitutes to the railway, however, the railway may be slower than flights but is usually more convenient while buses are the most convenient but usually slower. Hence, the threat is neither high nor low.

Buyer power refers to the power direct consumers hold; whether they can demand cheaper prices, better products. Buyer power is likely to be high in the railway as there is a low switching cost from 1 form of transport to the next.

Threats of new entrants can be also seen as the industries barriers to entry. This can include access to supply and distribution channels, a strong barrier for new railway entrants as large amounts of resources will be needed to build new trains and tracks may be difficult to share with existing market players.

The intensity of rivalry within the industry: If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no one else can do what you do, then you can often have tremendous strength. From this point of view, the railway industry has a relatively low intensity of rivalry.

Now lets look at the Macro, PESTLE. This is an acronym for Political, Economic, Socio-Cultural, Technological, Legal and Environmental. These are all factors that have a direct influence on any organization and PESTLE aims to how these factors will affect the organization.

Political includes privatisation/ deregulation policies, health and safety as well as government stability. For example, it would not be a good time for an organization to focus on the Ukrainian market due to its current political turmoil.

Economic refers to, but not solely, inflation, unemployment, consumer activity. Low inflation rates and a strong employment market would drive organisations to invest more since their investments are unlikely to devalue.

Socio-Cultural can refer to changes in lifestyles, education and health as well as distribution of income. During an epidemic, organisations could benefit more from providing products and services related to health.

Technological changes happen very quickly these days with new patents and products out in the market quicker than you can read this blog! Organisations that can keep up with these changes stand to benefit in the short and long run.

Legal is essentially the laws that can have both a direct and indirect effect on an organization. An example would be certain laws to protect society, which would prevent many organizations from selling harmful drugs.

Environmental factors refer to renewable energy supplies, green issues, carbon footprints, etc. To curb global warming from worsening, more and more companies are required to be greener in their operations and this may affect their production costs among other things.

These are the various environmental factors in an organizational context.

“Business is like living in a jungle, you need to be constantly aware of your surroundings lest someone takes over you before you can react on time.”

                                                                                                                                      Nitin Bhagwan ;)

Material Links:

1. http://www.businessdictionary.com/definition/internal-environment.html
2. http://www.mindtools.com/pages/article/newTMC_08.htm