Introduction
Organizations’ performance largely depends on the environment under which they operate. Here, environment can mean either internal or external factors that directly or indirectly affect how an organization operates towards achieving its set goals.
These factors are known for causing either positive or negative impacts that consequently influencing how that organization works. In most cases, environments dictate how organization operates, and the more stable an environment is, the more successful it will be. At times, organizations can change their way of operation or structural body in order to match with the environmental conditions.
Environment also has a contribution towards the strategic plan of the organization. This is important because it provides means in which set goals and objectives are achieved.
For an organization to perform best, it must have competitive advantage in that, it must be in a position to offer different goods and services in a different manner with the immediate organizations or of the same goods and services but in a different way that is most likely to satisfy the customer.
Other factors in the surrounding that are likely to have an impact on an organization include; the market in which it operates, availability of skilled labor, availability of required resources and raw materials, accessibility, availability of potential customers and their level of demand for the products.
The internal factors may include; management, organizational structure, availability of funds and synergy aspects in the organization (Draft, Marcic, 2010). In some cases, organizations can change the environment under which they operate; this is due to the objectives, goals, vision and mission of the organization.
Due to the services delivered, organizations can affect its surrounding either negatively or positively. The type of environment available is bound to determine how an organization will operate either for the better or worst.
How environment shape organizations
The ability of an organization to succeed depends with the ease with which it adapts to the new environment. This is due to the fact that environment has the capability of affecting how resources are utilized and how products are received by the customers.
In most cases, organizations are affected internally by factors such as regulation measures for safety and other services such like packaging and advertising. Work processes and organizational structure is also affected (Harrison, 2005).
Environmental factors that are bound to affect an organization are divided into two categories, that is; PEST and SWOT. Under pest, political, economic, social and technological (PEST) aspects are considered. On the other hand, strengths, weaknesses, opportunities and threats (SWOT) are considered. These factors are determined through analysis that is PEST and SWOT analysis respectively.
PEST analysis and at times referred to STEP analysis can be defined as macroeconomic factors that are capable of influencing strategic planning in an environmental scan. In the United Kingdom, environmental and legal factors have been chipped in amounting these acronyms to PESTEL or PESTLE. Today, ethics and demographic factors have been included to make the acronyms STEEPLED.
PEST analysis is important as it helps an organization know some of the factors that have to be put in mind for a successful operation. Usually, it enables an organization understand its current position, its potentials, performances of its market and how to continue in its field of operation without much hindrances.
The earlier mentioned macroeconomic factors do not directly affect an organization but do affect demand and supply of goods and services eventually affecting its performances. PEST analysis is vital especially when a company wants to join a new market as it helps identify the available opportunities (What is PEST analysis? , n.d)
Main aspects of PEST analysis
Economic
Factors considered here include; changes in various rates such as inflation, exchange and interest. Economic growth in a country is inclusive; this factor is core for any business progress as it determines it’s easy or difficult of succeeding. This is so because it affects demand and available capital plus its cost.
In cases where capital is readily available due to its cheap cost, organization can be in a position to invest easily with hopes of making profits. It is also apparent that demand of some goods and services grows with the positive growth of a country’s economy.
Chances for successful exploitation of a certain strategy is also determined by the economic conditions at the very time, it is possible for an organization to perform well during economic recession while another can only succeed during economic rise depending on the services or goods being provided.
It is therefore possible for the latter one quitting the market making a way for the former to get into the market. Many organizations leave the market during times of economic crisis.
Exchange rates are also known to determine hoe cheap or how expensive imported goods are, this suggest the price at which goods and services offered by the organization will be sold or bought at. Inflation rates have a great influence on a company’s progress because with a continued increase in good’s prices over time, demand decreases and this affects sales in a company leading to its collapse.
Variations in rates of interests can have adverse effect on organizations during loan repayment or any other payment. This is in the sense that, repayment is made b use of the agreed rate regardless of the rise or drop in rates at the time of payment.
If for example, during time of crediting the rates are high then they drop during payment, the company is likely to gain in terms of monetary value and vice verse. All these rates are interrelated and they have an impact on how an organization operates.
Political
The government has an influence on a country’s economy through; tax policy, political stability, employment rules, environmental laws, tariffs and trade restrictions. In most case the government have the mandate to determine the goods to import or export and those ones not to. Also, it can decide on the countries to trade or not trade with. These decisions affect organizations either positively or negatively.
Interest rates are influenced by inflation rates which greatly depend on the banks restrictions outlined by the government’s priority. The government has a big role in the determination of how organizations are funded. Political stability has also a direct effect on how a company can perform.
During political crisis, many companies are unable to operate leading to their low performances, as compared to the times when there is peace in a country. Qualified labor is required for best performance which ii only possible through training that is directly influenced by the government.
A country’s infrastructure and health are also under the control of the government and they have an impact on the companies’ progress in terms of goods and services delivery and adequate labor respectively.
Social
Demography, age distribution, health issues, safety concerns and profession stance are some of the factors under this. A company’s performance and its products demand are dictated by social aspects. For example, young people have vigor and are more willing to work as compared to the aging employees, this has a direct effect on how a company operates and if young labor is to be incorporated, labor value increases.
Demand of a company’s products depends on age distribution and the number of people working. It is therefore important for a company to recognize how demand changes with fashion in order to operate to an optimal customer satisfaction.
Technology
Technology is comprised of automation, technological advancements, research and development (R and D activity). These factors have influences such as lowering entry barriers into the market, maintaining economic level quantity (EOQ) and decisions outsourcing.
Technology leads to innovations and creation of new industries. Technology offers a company competitive advantage thus creating threats to the existing ones. It has a hand in improving an organization’s services and products though this can be an additional cost due to the required training before it is being implemented.
Environmental
Specific industries are prone of environmental and ecological factors such as weather and climate change. Such organizations include; insurance, tourism and agriculture. Knowledge of these factors influence companies’ performance and how they deliver creating. This paves way for new market and demolition of the ones in operation.
Legal
These factors include laws such as antitrust, employment, consumer, discrimination, security and health. All these laws affects ways in which an organization works and the rate of its product’s demand.
PEST analysis is an appropriate and effective tool of creating a clear image of the environment under which organizations work.
Threats and opportunities of a given organization are determined through this analysis hence supporting strategic planning that helps in attainment of the set goals in a more sufficient manner compared to its surrounding competitors. Together with PEST analysis, SWOT analysis can be used in order to determine environment- organization relationship.
SWOT analysis
SWOT analysis is a method used before any strategic planning or marketing for a company is done. It is an auditing tool that evaluates an organization’s strengths, weaknesses, opportunities and threats. Before this analysis is carried out, objectives have to be set in order for this analysis to determine whether they are attainable, if not a different objective is set until an obtainable one is got.
Strengths and weaknesses are considered to be internal factors of an organization while threats and opportunities are external factors (SWOT analysis, n.d). Internal factors can be controlled by an organization and may include marketing and finance while external ones cannot, they comprise of political influences, economic conditions, technology advancement and completion among others.
SWOT analysis is also known as TOWS analysis. It can be used to aid in decision making in an organization. Some of the things that can be assessed through SWOT analysis include; how to carry out sales, an organization’s stand in the market, available opportunities for investment, decision outsourcing to mention but a few (SWOT analysis method and examples, with free SWOT template n.d).
Strengths
Strengths are features of a company that puts it in a position to perform well in the market as compared to its competitors. Strengths give an organization a competitive advantage. This is attributed to the availability of competent labor and resources. Always, this enables a company to meet customer’s needs in a more sufficient way making it venture well in its activities.
When customer’s wishes are met, then demand for this organization’s products increases making a continued operation of the company. Due to strengths in some organizations, they are capable of operating sufficiently while the disadvantaged ones are forced out of the market.
Weaknesses
Just like strengths, weaknesses are features of a company that disadvantages it in its efforts to compete in the market. This is an internal factor that can be noted by both the organization itself and the customers. Weaknesses are caused by deficiencies in labor and other competences in relation to other organization performing in the market.
These loop holes impedes a company’s ability to compete well in the market. For successful operation, such an organization is supposed to accept the bitter fact that it has shortcomings and devise immediate measures of correcting them.
Opportunities
Opportunities are available chances in the environment for an organization to utilize in order to increase its sales and earn more revenue. Chances are available at all places and they are made a reality by such factors such as technological advancement, age distribution patterns, government policies and many more. At times, a market of the past can be ignored not knowing that it is a potential opportunity.
Another opportunity that can be ready for utilization is when there is a positive relationship between the customer and the organization. Opportunities are very important especially when utilized for they enable a firm deliver in the best way possible resulting into customer satisfaction.
Threats
These are external factors that are likely to cause chaos in an organization. Usually, threats affect the environment in which a firm operates and they are often not in a company’s control. Threats always present hindrances to a company’s efforts to achieve its objectives.
Such factors may include; innovative competitors in the market, high bargaining power in transactions by the potential customers, changes in technology and new laws. Threats are bound to be faced and the only way out is by the organization having to devise ways of countering these dangers.
External and internal factors can be combined to form a tactical medium, such include the following four; Maxi-maxi which is a matching of strengths and opportunities, it is a fact that for an organization to fully utilize the available opportunities, it must first of all put into effect all of its strengths.
Maxi-mini combination which combines strengths and threats which portrays the benefit of an organization using its strength in order to counter evident threats.
Mini- maxi whereby an organization’s weaknesses and opportunities are combined, in this, an organization is supposed to make use of the available opportunities in order to combat its weaknesses. Mini-mini which is a mixture of weaknesses and threats, it portrays an organization’s weaknesses in relation to the present external threats. Mini-mini strategy helps an organization reduce its weaknesses and counter the foreseeable threats.
Porter’s competitive model
This model was proposed by Michel Porter in which micro- environment is observed to have impacts on a company’s strive its objectives. He identifies five forces that are close to an organization that influences how an organization performs in the marketplace.
This strategy has proved important in the way of analysis external threats to an organization. It is the most commonly used business strategy (Five competitive forces model porter 2011). The five identified forces are discussed below;
Threat of new entrants
It is common for a well performing industry to attract new investors. These new entrants act as a threat to the existing company in that profits will be reduced even up to zero. To discourage such a threat, entry barriers can be raised so as to discourage new entrance into the market.
Exit barriers are also lowered so as to enable poor performing firms exit the market. Examples of barriers involved include revenge from already industry players, capital required, accessibility to distribution routes and scale economies.
Availability of product’ substitutes
A threat to an organization’s products and services is experienced when there exists new and equal substitutes. These encourage customers to switch to these alternatives thus affecting an organization’s performance. Apart from a customer’s readiness to go for substitute, other threats that result from this are; how the new substitutes work in the market and their cost, also how much it costs to switch to this alternatives.
Customer’s/ buyer’s bargaining power
Bargaining power for buyers is high when there are many suppliers and more distribution channels for a product. This is a threat to an organization as there will be no constant customers as they will always have a variety means of the required products at a price that is friendly to them. Profits are cut down tremendously when there exists such a threat.
Suppliers’ bargaining power
Suppliers have a key role in the determination of a company’s profitability. This is because they supply material such as raw materials, labor and expertise. When the bargaining power for suppliers is high, then the profits made will be lower.
This is possible when a firm is not the only customer to the supplier or when a supplier is the only one serving the firm. In such cases, a supplier can be reluctant to work with a firm or hike the supply cost and this has a great effect on an organization.
Intensity of competition from rivalry
Rivalry to an organization is brought about by various aspects such as availability of competitors whereby if there are equal organizations in mode of their structure, then competition will be high as compared to when there are rare industries of the same size. Others may include industries’ costs, product differentiation level, exit and entry costs and strategic objectives (Strategy- analyzing competitive industry structure 2004).
Conclusion
It is evident that an organization’s shape is determined by the environment in which it operates. Factors affecting an organization can be either external or internal. In business these factors can be evaluated by use of analysis strategies such as the SWOT, PEST and porter’s competitive models.
Usually, the identified micro and macro environment are known to influence an organization’s performance in the market either positively or negatively. Therefore, an organization’s ability to achieve its set goals heavily depends on these environmental factors.
Environment is also capable of determining how organizations enter new markets or exit. Environments are therefore very important as it can help organization know what products to deal with or how to attain a competitive advantage over its rivalries.
References List
Draft, R. Marcic, Dorothy. (2010). Understanding Management. Wodsworth: Cengage Learning.
Five competitive forces model porter. (2011). Web.
Harrison, M. (2005). Diagnosing organizations: methods, models and processes. London: Sage.
Strategic management. Web.
Strategy- analyzing competitive industry structure. (2004). Web.
SWOT analysis examples: Reports on different companies. Web.
SWOT analysis method and examples, with free SWOT template. Web.
What is PEST analysis? Web.