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Chapter 6 – The External Environment’s Influence

Learning Objectives

By the end of the chapter, you should be able to:

Identify and describe common external forces on organization and various levels of influence, such as local, regional, provincial, national, and/or global.
Identify and explain the opportunities and threats that arise from the influence of common external environmental influences.
Explain how uncertainty and complexity influence a business’s ability to navigate its external environmental influence.
Describe how businesses design themselves in order to thrive as an organization within their external environment.
Explain in the chapter.

Show What You Know

The External Environment’s Effect – It’s Different and It’s Not

When we think of an organization’s external environment and how it influences a company’s day-to-day actions, it is clear that each company will face unique opportunities and challenges as they respond to their external environment.

For example, the needs of a mom ‘n’ pop shop selling regional goods in rural Northern British Columbia vary greatly with the needs of Lululemon, operating in hundreds of locations internationally.

Despite their differences, if we zoom out and look at the bigger picture, we will see that actually there are some common trends for these two companies. As discussed in Chapter 1, all companies need to be aware of how the company is affected by its customers, its competitors, its suppliers, socio-cultural influences, the environmental/natural needs, and effects, the political context, legal factors, technological needs and trends, and the economy. All companies need to be aware of these influences and ready to adapt as needed.

For the mom ‘n’ pop shop selling regional wares in Northern British Columbia, the customers, competitors, and suppliers will be easier to identify and simpler to understand how they influence what the company should do compared to what Lululemon would need to know and understand about its customers, competitors, and suppliers. So, while they share needs in similar areas the level of and that they face in each of these things differs. In this chapter, we will take a deeper dive into the common external forces influencing companies, discuss how to find opportunities and recognize threats from the external environment, unpack how complexity and uncertainty influence business, and analyze how all of the above can impact the way a company should be designed and operate.

Common External Forces

In Chapter 1, we built an understanding of the business’s:

– Business participants are the people who participate in conducting the work of the business.
– Stakeholders are those affected by the business’s operations and its decisions.
– External environmental factors that influence what the company does and how it does it.

As illustrated in Figure 6.1, there is an overlap between these three groups. As an example, existing suppliers can be stakeholders and participants. What’s more, because they act independently from the organization, suppliers can also be external environmental influences. Before you move on, take a moment to review Figure 6.1. Specifically, test yourself with:

Defining each key term
Identifying each term as a participant, stakeholder, function, or external influence (remember some can be more than one), and
Provide an example of why each term is important to a business.

Figure 6.1 The Organization’s Landscape

What We Need to Know About External Environmental Factors

As we explore the business’s external environmental factors, it is important that we understand the levels at which these factors can be considered and common ways that these factors influence businesses.

Levels of Factors

When considering the external environmental factors impacting a business, it is important to note that there are levels at which these influences occur.

– The community level
– The level that is the combination of communities
– The provincial/state level which includes multiple regions
– The federal level
– The combination of multiple nations
– The worldwide level

To get an understanding of how the levels affect each company differently, let us use our example companies from the introduction to illustrate the levels of influences that impact them the most. In Table 6.1, a brief example of each influence has been shared. This table just highlights quick examples, but going deeper there could be many more. As you look at these, bear in mind that the external environmental factors are entirely outside the control of the business.

Figure 6.1 How the External Local Environment Can Affect Different Companies

Local Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
Local political leanings affect taxes.
Local political leanings affect taxes.

Economic
Local economy affects spending patterns of customers, directly impacting the majority of sales.
Local economy affects spending patterns of customers, impacting local sales.

Social and Cultural
Directly impacts customer preferences in terms of which items they will/will not buy.
Somewhat impacts customer preferences, but usually does not directly impact the local level.

Legal
The local laws governs the zoning, policies, and other requirements of the business as a whole.
The local laws governs the zoning, policies, and other requirements and differ in each of the company’s locations..

Technological
Customers could have a common pattern for how they use technology to pay for things.
Usually an indirect impact because they focus on trends at higher levels.

Environmental/ Natural
The weather affects the customer’s desire to go shopping, impacting the number of sales the store has and the items the store wants.
The weather affects what items that customer’s want to buy in each of the local areas it operates.

Table 6.2 How the Regional Environment Can Affect Different Companies

Regional Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
Regional politics affect how stable the political situation is locally, regionally, and provincially.
Regional politics affect the company differently in each region in which it operates.

Economic
Regional economy affects spending patterns of customer, directly impacting a large portion of sales.
Regional economy affects spending patterns of customer, impacting the regions sales in each region in which it operates.

Social and Cultural
Directly impacts customer preferences in terms of which items they will/will not buy.
Somewhat impacts customer preferences in what items are wanted and therefore developed by the company for that regions stores.

Legal
Regional policies are usually less impactful, but can impact the company if there is a strong regional influence.
Regional policies are usually less impactful, but can impact the company if there is a strong regional influence in the region in which it operates.

Technological
Customers could have a common pattern for ow they use technology to ay for things.
Usually an indirect impact because they focus on trends at higher levels.

Table 6.3 How the Provincial Environment Can Affect Different Companies

Provincial Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
Provincial politics affect how stable the political situation is provincially, which in turn affects tax rates, minimum wage, and other important factors.
Provincial politics affect how stable the political situation is in each region it operates, which in turn affects tax rates, minimum wage, and other important factors.

Economic
Provincial economy affects spending patterns of customers and the cost and availability of supplies.
Provincial economy affects spending patterns, impacting the regions of sales in each region in which it serves.

Social and Cultural
Generally impacts customer preferences in terms of which items they will/will not buy.
Somewhat impacts customer preferences in what items are wanted and therefore developed by the company.

Legal
Provincial laws affects tax, minimum wage, and other important factors; these have a direct impact on company’s expenses.
Provincial laws affects tax, minimum wage, and other important factors; these have a direct impact on company’s expenses in that Province.

Technological
Customers could have pattern of how they use technology to pay for things.
Usually an indirect impact because they focus on trends at higher levels.

Environmental/ Natural
The environment does not directly impact the company at this level, but could impact indirectly customer preferences.
The environment does not directly impact the company at this level.

Table 6.4 How the National Environment Can Affect Different Companies

National Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
National politics affect how stable the political situation is, which in turn affects changes to federal tax rates and other important factors.
National politics affect how stable the political situation is in each region it operates, which in turn affects federal tax rates and other important factors.

Economic
National economy affects the cost and availability of suppliers and can also affect spending patterns of customers.
Each national economy in which the company operates affect cost of supplies, availability of suppliers, and the spending patterns of that nations customers.

Social and Cultural
Can have an indirect impact on what customer’s preferences are for products.
Somewhat impacts customer preferences in what items are wanted and therefore developed by the company.

Legal
National laws affects tax rates and other important factors; these have a direct impact on the company’s expenses.
National laws affects tax rates, minimum wage, and other important factors; these have a direct impact on the company’s expenses in the country.

Technological
Impact of national privacy laws, affecting what the stores needs to do with customer data.
Each country has unique privacy laws, which affects what the stores needs to do with customer data in each country.

Environmental/ Natural
The environment does not directly impact the company at this level, but could impact indirectly customer preferences. If there is a natural disaster though, it could affect the transportation of supplies, which could impact what the shop can sell.
The environment does not impact the company at this level, except if the natural environment causes a disruption in supplies. For example, if there is natural disaster that wipes out key supply routes, then it would mean less access to supplies to make their products and/or a harder time shipping their products.

Table 6.5 How the Regional (Global) Environment Can Affect Different Companies

Regional (Global) Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
The political climate has an indirect impact as it can change the learning of the governments in power, which in turn can change laws and policies. The business owner should be aware of these, but not overly so.
This can be very important to the multinational company, especially if its focus is within a particular region (like North America). For Lululemon, most of the stores are in North America, so regional politics (be they smooth or challenging) can have an impact on trade, which directly affects the price points of goods sold.

Economic
Similar to political environment, being aware of this is helpful as it can affect trade, which in turn affects supplies and price points.
In regions, such as North America, in which the economics are closely linked. The economy of one country can have a large impact on the another. Thus, it is very important to pay attention to the economy and its effects.

Social and Cultural
This is indirectly relevant to the small rural business as they do not need to focus much energy on trends beyond the provincial level.
This is highly important for a company working within or across global regions, especially in retail. Paying attention to the social and cultural trends can help Lululemon become more able to create products that will be popular across all of their stories.

Legal
This has little direct impact on the smaller stores when compared to larger changes. However, smaller stores should be aware of the big changes.
Legal requirements for import/export and immigration within a region can greatly impact the ease with which a company, such as Lululemon, can transport its goods across borders and have mobility in their employees (In terms of where they work)

Technological
This is less important for the smaller business, except tech trends within a global region can affect what software and hardware are available.
The tech trends in a region affect a multinational company because, for efficiency sake, they will want to try to have the same type of systems in their stores. Thus, finding large regional trends will help them choose systems that work across all of their stores, not just in specific areas.

Environmental/ Natural
This doesn’t have a direct effect on a small business unless the environmental/natural context impacts the supply. For example: If there is a flood that disrupts a key type of supply, they may not have as much access to that product for a particular period of time.
The environment does not directly impact the company at this level, except if the natural environment causes a disruption in the regional supply chain, For example, if supplies come from the Pacific Northwest, in the US, and the area is hit by a Tsunami, causing damage to facilities and trade routes, then fewer supplies would be available.

Table 6.6 How the Global Environment Can Affect Different Companies

Global Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
The political climate has an indirect impact as it can change the learning of the governments in power, which in turn can change laws and policies. The business owner should be aware of these, but not overly so.
This can be very important to the multinational company, especially if its focus is on different trade perspectives by various political groups. For Lululemon, most of the stores are in North America; however, most retail stores depend on supplies from East Asia. Thus, if the trade relations are unsteady, it can affect the supply availability and cost.

Economic
Similar to the political climate, being aware of this is helpful as it can affect trade, which in turn affects supplies and price points.
With the global linkages of economy, it is very important to pay attention to the economy and its effects for multinational companies, especially global regions related to customers and suppliers.

Legal
This has a little direct impact on the smaller stores when compared to larger changes. However, smaller stores should aware of the big changes.
Legal requirements for import/export and immigration globally can impact the ease with which a company, such as Lululemon, can transport its goods across boarder and have mobility in their employees (In terms of where they work(.

Technological
This is less important for a small business, except tech trends within a global region can affect what software and hardware are available.
The tech trend globally are less important for a company like Lululemon that focuses its efforts in North America. However, being aware of these trends to anticipate what will dominate the tech landscape in North America is critical.

Environmental/ Natural
This doesn’t have a direct effect on a small business unless the environmental/natural context impacts the supply. For example: If there is a flood that disrupts a key type of supply, they may not have as much access to that product for a particular period of time.
The environment does not directly impact the company at this level, except if the natural environment causes a disruption in the regional supply chain, For example, if supplies come from the China, and they have a devasting earthquake in a manufacturing city, it can cause there to be fewer supplies would be available.

As evident in the comparison in Figure 6.6, what a company focuses on depends on how it operates. Namely, a large multinational corporation will have to focus on many local, regional, provincial, and even national considerations while keeping its eye on its global region and the overall global trends. On the other hand, the local Mom ‘n’ Pop shop needs to focus deeply on one local area and region most of the time and be aware of national, global region, and global trends. The demands of the company differ, but the factors remain the same – political, economic, social and cultural, legal, technological, and natural/environmental.

Common Influences of the Environmental Factors

When looking at the political, economic, social and cultural, legal, technological, and natural/environmental factors, common influences emerge. This, in turn, makes it easier for the business owner to understand how to pay attention to these factors and understand their impact on their business.

Finding Opportunities and Recognizing Threats

Because external environmental factors cannot be controlled by the business, it is common for the focus to be on the negative impact that a company experiences as a result of a change in its external environment. However, each external environmental factor produces both opportunities and threats. Common and identified in Table 6.2 below.

Figure 6.7 Common Opportunities and Threats from the External Environment

(move the slider left to right to compare the opportunities and threats)

Now, it is time to apply these concepts. For the two companies that we have discussed so far, sort between the opportunities and threats.

Exercise 6.1 Put to the Test – Opportunity or Threat?

If Exercise 6.1 was challenging, it might be time to review Figure 6.8 and/or use the hints in Exercise 6.1.

Understanding the Role of Uncertainty and Complexity

In this section, we will discuss the role of and . Specifically, we will try to answer the questions.

What is complexity and how does it influence the business’s approach to the external environment?
What is uncertainty and how does it influence the business’s approach to the external environment?
Why do companies need to be aware of uncertainty and complexity?

Complexity

In considering complexity, it is perhaps easier to compare again our two sample companies – the Mom ‘n’ Pop Shop and Lululemon. By comparing these, the two sides of the complexity spectrum become clearer.

Figure 6.8 Comparing the Complexity of Two Companies

National Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
Requires the general knowledge of the political factors that affect small businesses.
Requires coherent knowledge of the impacts of all the political contexts in which it operates – local, regional, provincial, national, regional (global), and global.

Economic
Needs to understand how the local, regional and perhaps the provincial economy affects their customers buying behaviors.
Requires coherent knowledge of the impacts of all the economic contexts in which it operates – local, regional, provincial, national, regional (global), and global.

Social and Cultural
Requires a clear understanding of the social and cultural trends that affect their business.
Requires coherent knowledge of the impacts of all the social trends and cultural expectations in which it operates – local, regional, provincial, national, regional (global), and global.

Legal
Requires a clear knowledge of the legal factors that affects small businesses.
Requires a coherent knowledge of the impacts of all the legal requirements in which it operates – local, regional, provincial, national, regional (global), and global.

Technological
Requires an understanding of the technology required to conduct their business.
Requires a clear and operational understanding of the impact of technology requirements and trends in all the levels in which it operates local, regional, provincial, national, regional (global), and global.

Environmental/ Natural
Requires knowledge of existing and environmental impacts at the local, regional and provincial level and (if suppliers are affected, sometimes at the national and global levels).
Requires a clear and operational understanding of the impact of emerging and existing environmental situations and existing environmental expectations at all levels in which it operates in which it operates – local, regional, provincial, national, regional (global), and global.

Conclusion = Simple

Conclusion = Complex

As illustrated in Figure 6.8, companies in a simple environment only require a basic to general understanding of most factors, whereas companies in a complex environment require specialized knowledge, often in multiple areas and at multiple areas.

Uncertainty

When there is uncertainty in its environment, a company has factors that change often and often unpredictably. As the focus moves to uncertainty, we can again rely on our two companies to clarify what companies look like in stable versus unstable environments.

Figure 6.9 Comparing the Uncertainty of Two Companies

National Environment
Mom ‘n’ Pop Shop (in rural area)
Lululemon (multinational company)

Political
The political climate stays the same in the local and regional area; big changes that affect the business only happen occasionally at the provincial or national levels-those are usually predictable.
The political climate at the multiple levels (local to global) change moderately to very often, trends at one or more levels are unpredictable.

Economic
The economic factors that change do so in a manner that is predictable, if big changes come they all affect all businesses.
Economic changes across the levels (Local to global) change and require the company to adapt its operations and offering of goods to maintain sustainable income.

Social and Cultural
Trends of what customers want from the shop are fairly stable. Big changes come every 2-3 years.
Trends changes often. What’s more, the importance of social media means that trends can change dramatically in a short span of time.

Legal
The legal changes, like the political climate, are fairly steady. Big changes usually only happen at the provincial and federal levels and usually in predictable ways.
Balancing the needs of the multiple levels can be challenging as the multiple levels have inconsistency. So, there is not one approach that can work, so the company must pay attention and adapt to all.

Technological
These trends usually don’t affect the business. They can continue to use the same tech until it becomes obsolete. They have a fair amount of warning before that happens.
The tech trends can change fairly often in terms of the hardware and software they use in their managerial roles as well as in the fabrication of their products. They must be aware of trends in all areas.

Environmental/ Natural
The environmental impacts are all indirect, unless a disaster hits (a rare occurrence). So, all in all, this is fairly stable.
The environmental changes that can affect supply and transport of their products are ever changing and require quick adaptation.

Conclusion = Stable (low

uncertainty)

Conclusion = Unstable

(high

uncertainty

)

What Is the Impact of Complexity and Uncertainty?

The impact of complexity and uncertainty, while illustrated in Tables 6.2 and 6.3, is more than just what the business needs to focus on. It is also about the capabilities that the business needs to develop. Some of the most well-known businesses began as startups during the Great Recession in the mid-2000s, including Airbnb, Uber, and Groupon. Their success demonstrates that it’s possible for startups to achieve incredible growth, even during uncertain times.

In complex and uncertain environments – Organizations need to be astute to see what is happening and understand the trends as well as nimble enough to change with the ebbs and flows of the environment.
In simple and stable environments – Organizations need to build best practices to increase efficiency, but also be aware of major changes on the horizon. They need to get information and use it quickly to stay ahead of the competition that usually has access to the same information.
In moderately complex and moderately stable environments – Organizations are constantly balancing efficiency with adaptability in order to build practices that allow for cost savings, but that can be changed as trends change.

These differing needs lead us to the conclusion that one size does not fit all. In fact, each organization needs a design that is uniquely suited to meet the needs of its environment. We will pick this idea up again in Chapter 10 – Structuring Organizations. Until then, the three examples above should help with the main archetypes.

Comprehension Check

Define the following terms:
- Participants
- Stakeholders
- External Environmental Factors
- Complexity
- Uncertainty
- Opportunities
- Threats
List and define the levels of the external environment.
List and define the key factors in the external environment.
Give three examples of common opportunities and three threat examples that arise in the external environment.
Explain how uncertainty and complexity affect organizations.
Describe what an organization should focus on in a:
- Complex and uncertain environment
- Simple and stable environment
- Moderately complex and moderately uncertain environment

Key Takeaways

Important terms and concepts:

The common external environment factors that businesses should consider are political, economic, social and cultural, legal, technological, and environmental/natural.
The external environmental factors affect the organization at multiple levels: local, regional, provincial, federal, regional (global), and global.
Even though companies differ greatly, there are common opportunities for all businesses. For example, most businesses prefer conservative political climates and the laws passed by conservative governments. Weak economies are favorable for companies that provide low cost options, but challenging for other companies because customers spend less if the economy is weak. If the company can connect with social and cultural trends and expectations, they tend to do better. Companies prefer technological developments and natural climate conditions that make buying easier.
External environmental uncertainty makes it harder to predict what the business needs to do to respond to the changes in its environment and also means the business needs to be able to adapt quickly to changes. On the other hand, stable (low uncertainty) external environments allow the company to refine its practices and look for efficiencies to get a competitive advantage.
Complexity in the external environment makes it harder for businesses to understand the factors affecting it, and it often requires specialized knowledge in multiple areas to understand. Conversely, simple external environments have easily discernible information. That can be challenging though because both the business and its competitors have easy access to the same information, which can make it more competitive.
In complex and uncertain environments – Organizations need to be astute to see what is happening and understand the trends as well as nimble enough to change with the ebbs and flows of the environment.
In simple and stable environments – Organizations need to build best practices to increase efficiency, but also be aware of major changes on the horizon. They need to get information and use it quickly to stay ahead of the competition that usually has access to the same information.
In moderately complex and moderately stable environments – Organizations are constantly balancing efficiency with adaptability in order to build practices that allow for cost savings, but that can be changed as trends change.

Key terms appear throughout the chapter. When you click on them, a definition will pop up. If you are using a downloaded or printed format, check the glossary in the back of the book. Please make sure you can define them!

Complexity in the external environment is related to the extent to which the business requires specialized and differing knowledge in order to understand the influences of the environment and how to operate the business.

The level of uncertainty a company faces is related to the extent to which the factors in the environment change in a predictable manner. If the changes are steady and change predictable, then there is low uncertainty. If they change often and in unpredictable ways, there is high uncertainty.

Business participants are the people who participate in conducting the work of the business. These always include the employees and managers, but often include suppliers, customers, and shareholders.

Stakeholders are those affected by the business’s operations and its decisions. Examples of stakeholders include shareholders, investors, the community, customers, competitors, and governmental agencies.

External environmental factors are the factors outside the organization that influence the business. These often include the social and cultural, natural environment, political, legal, technological, and economic factors.

The local area in which a company operates, such as Vancouver, Burnaby, Richmond, or Surrey in British Columbia, can affect all areas of the external environment.

The region in which the local community belongs, such as MetroVancouver, Fraser Valley, or Cariboo Chilcotin, often affects many to allareas of the external environment.

The province in which the company operates, sometimes referred to as “State” in countries that have states instead of provinces; this level impacts all areas of the external environment.

The country’s influence on the company’s operations; for most companies, this level has a broad reaching impact on most to all areas of the external environment, especially companies that are in more than one province or global.

The influence of the nation’s region, such as North America, often has a clear influence on the legal, political, cultural, social, and economic factors as well as others.

The highest level of influence; in our globalized society, this can have an impact on all external factors.

In business, we look at opportunities as positive options for the business that arise from the external environment.

In business, we look at threats as positive impacts for the business that arise from changes in the external environment.