1. Understanding Internal and External Environments
Chapter 2
Prepared by C.J. Bamforth

2. Learning Objectives
LO1 – The concept of mega environment and its elements.
LO2 – The concept of task environment and mega environment and its elements.
LO3 –The population ecology and resource dependence views of the organisation–environment interface.
LO4 – How environmental uncertainty and bounty impact organisations.
LO5 –Major methods that organisations use to manage their environments.
LO6 – Nature of organisational culture and its major manifestations.
LO7 –Nature of organisational culture and its major manifestations.
LO8 – Changing organisational culture.
After studying this chapter, you should be able to:
LO1 Explain the concept of mega-environment and outline its major elements.
LO2 Distinguish between the concepts of task environment and mega-environment and describe major task-environment elements.
LO3 Contrast the population ecology and resource dependence views of the organisation-environment interface.
LO4 Explain how environmental uncertainty and bounty impact on organisations.
LO5 Describe the major methods that organisations use to manage their environments.
LO6 Explain the nature of organisational culture and its major manifestations.
LO7 Contrast entrepreneurial and administrative cultures as a means of promoting innovation.
LO8 Explain how organisational cultures can be changed.
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3. The Internal and External Environments of the Organisation
This diagram (Figure 2.1, Bartol et al, 2011, p.39) shows the two major types of external environmental analysis that organisations carry out. One deals with the wider or general/mega environment over which the organisation has little or no control. The other deals with the organisation’s immediate external environment – the task environment – over which the organisation has some influence. These will be explored in more detail in the following slides.
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4. LO1 The mega environment and its elements
The mega (General) environment
Political/legal element
Economic element
Sociocultural (demographic) element
Technological element
International element
“An organisation’s external environment influences its goals/objectives and strategies – the major forces outside the organisation which can influence the success or failure of its products or services.” (Bartol et al, 2011, p.38). An organisation will fail if it cannot align its internal environment (or general internal conditions) to cope with external environmental demands. The internal environment is often thought to describe an organisation’s culture (or its system of shared values, assumptions, beliefs, practices, rituals, customs and norms that unite its members together). However, the term internal environment can also be used to more widely refer to such things as organisational structure, core competencies etc.
‘Systems theory argues that an organisation’s environment is important to its success. According to this theory, a successful organisation must operate as an open system interacting with and gaining feedback from the external environment’ (Bartol et al, 2011, p.38).
The mega or general environment refers to the broad social conditions and trends impacting an organisation and over which the organisation has little if no control. One way to categorise these influences is into political/legal; economic; socio-cultural; technological; and international influences (or elements). Analysing the environment in this way is often called a PEST(I) analysis. PESTI is particularly complex for those operating in several countries as they may be subject to multiple and possibly conflicting PESTI requirements.
The Political/legal element refers to legal and governmental systems which impact the organisation. Legislative trends (e.g. In taxation, carbon emissions, employment laws, general government policy, consumer tax (GST)); legal decisions, politics and government regulation can all contribute to have a major impact on an organisations operation and performance.
The Economic element relates to how wealth is produced, distributed and consumed. In a capitalist economy, market forces dictate how much individuals own and control the means of production e.g. factories. In a socialist economy, the economy owns the means of production and economic activity is managed by a plan. Most national economies are hybrids (see p.39 in Bartol et al, 2011 for a fuller discussion of this). Other economic factors likely to impact organisations are inflation, interest rates, exchange rates and share markets, disposable incomes, personal savings and employment levels.
The Sociocultural/demographic element refers to the attitudes, norms, beliefs, behaviours and typical regional demographic trends e.g. delayed marriage, increasing numbers of single parent households, greying baby boomers, workforce diversity, more elderly and a higher representation of minorities in business, the community and politics.
The Technological element refers to the current knowledge about product and service generation. An organisation’s success will depend on harnessing the most appropriate technological components for their, and their customers needs.
The International element refers to forces outside the organisation’s home country that impact the organisation’s operation and performance e.g. the global financial crisis (GFC), currency values, major trading agreements etc.
More information on these can be found on p.42, Bartol et al (2011).
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5. Example of a Mega Environmental Analysis
This diagram shows an analysis of the Mega environmental elements for Xerox (Figure 2.2, Bartol et al, 2011, p.40)
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6. LO2 The task environment and its elements
Customers/
clients
Competitors
Suppliers
Labour supply
Government agencies
The task environment is also an external environmental component but, unlike the mega/general environment, organisations have more influence over it. The task environment also consists of five elements (customers/clients; competitors; suppliers; employees; and government bodies).
Customers/clients are the people and firms who buy the organisations products and/or services.
Competitors are other firms offering, or potentially offering rival products and services.
Suppliers are companies and people who provide resources to support the organisation’s operations e.g. raw materials, products, services.
Labour supply/employees consists of the people employable by the organisation and how to attract, acquire and motivate them.
Government agencies refers to those government bodies that provide services and monitor compliance with laws and regulations within the country where the organisation is operating.
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7. Example of a Task Environmental Analysis
This diagram shows an analysis of the task environmental elements for Xerox (Figure 2.3, Bartol et al, 2011, p.43).
(Bartol et al, 2011, p.77)
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8. LO3 Two ways to describe how organisations interface with their environment
Population Ecology
/Natural Selection Model
(some survive while others fail)
Reactive model
Resource Dependent Model
(Organisations try to reduce dependence on environmental resources)
Proactive model
Belief that managers have little control, success dependent on luck and chance
Belief that managers can influence environmental aspects
How organisations interface with their environment has been described in two ways:
Some academics argue that environmental factors cause those that have the appropriate characteristics to survive while others fail (the population ecology or natural selection model).
Other academics argue that organisations have more control over their environment and are able to manipulate it to reduce their dependence upon it. ‘Although forming relationships with their suppliers helps solve many resource problems, these relationships also increase their dependency and reduce flexibility in both decision making and action. Organisations therefore seek independence by controlling critical resources or developing alternatives’ (Bartol et al, 2011, p.43).
Which do you believe is a more accurate model? Why?
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9. LO4 How uncertainty and bounty impact organisations
Environmental uncertainty, complexity and dynamism
Environmental bounty (capacity)
Managed by adapting to or changing the environment
Accurately assessing the environment is hard so managers tend to work off what they perceive the environment to be. This introduces lots of assumptions and biases which need to be recognised when important decisions are being made. In analysing the environment two key concepts are useful: environmental uncertainty and environmental bounty (or capacity).
‘Environmental uncertainty exists when an organisation’s future environment cannot be accurately assessed or predicted’ (Pfeiffer & Salancik 1978 in Bartol et al, 2011, p.46). As uncertainty in the environment increases, managers must spend more time monitoring and reacting to these changes. Two factors that increase environmental uncertainty are the number of factors going on in the environment at one time (environmental complexity) and how fast and predictably these change (environmental dynamism). When change is slow and fairly predictable, environments are stable. When change is fast and fairly unpredictable, the environment is unstable.
Environmental bounty or capacity refers to how much the environment can support sustained growth in a stable way. When the environment is bountiful, there is plenty for everyone and so everyone has a fair chance of succeeding. When resources are scarce, only the fittest or most aggressive will survive.
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10. LO5 Managing environmental elements
Adaption
Buffering
Smoothing
Forecasting
Rationing
Favourability
Use mass media
Boundary spanning
Recruitment
Negotiating contracts
Co-opting
Strategic alliances
Trade associations
Political activity
Shifting domains
Diversify current product, service, or geographic area to gain an advantage
In line with the Resource Dependent Model, some managers feel that they can manage their environment so that they can deliver sustainable performance. The methods they use have been classified into three common approaches:
1) Adaptation to the environment using such approaches as:
Buffering or stockpiling inputs or outputs from a production or service process to overcome environmental variations.
Smoothing or acting to reduce the environmental influence e.g. using electricity at the weekend when it is cheaper.
Forecasting or attempting to predict conditions and future events that are likely to impact the business.
Rationing or limiting access to a high demand product or service so that the organisation does not have to expand.
1) Favourability influence i.e. trying to change the environment to make them match organisational needs. This is done by:
Using mass media (i.e. advertising), to publicise products and services.
Boundary spanning i.e creating organisational roles to interface with major environmental elements. In this way the organisation can stay up to date with what is happening in the environment whilst also ensuring that those in the external environment receive information that is favourable to the organisation. Individuals in this type of role are salespeople, purchasing specialists, recruiters, admission offices, shipping and receiving agents, receptionists, lawyer and scientists.
Recruiting those with a close tie to a major influencing environmental element e.g. recruiting someone who is influential with the government to work in your organisation.
Negotiating contracts or seeking favourable agreements with significant others on significant issues.
Co-opting or absorbing key members of important environmental elements into the organisation’s leadership or policy-making structure.
Strategic alliances where two or more organisations form a cooperative partnership to gain market access, achieve production or marketing economies of scale to reduce cost, perform joint research or share technological knowledge (Thompson et al, 2007; Dess et al, 2008; Miller & Dess 1996 in Bartol et al, 2011).
Form or join trade associations in order to work with like minded individuals or firms on common business concerns.
Political activity – joining together with others to influence political issues in ways that favour the organisation.
3) Domain shifts or changing the product or service mix so that the environmental elements an organisation confronts are more favourable.
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11. LO6 Manifestations of organisational culture
How strong is the culture?
Does culture support organisational goals?
Is culture widely held?
How much do employees accept the culture?
Symbols
Stories
Culture
Rites, rituals, ceremonies
‘Culture determines an organisation’s success or failure’ (Accountancy Ireland 2006 in Bartol et al, 2011, p.50). Culture allows members to act on shared values, so that behaviours impact organisational effectiveness. Three aspects of culture have been found to be important – direction, pervasiveness and strength (Martin 1992; Schein 1992 in Bartol et al, 2011).
1) Direction refers to how much a culture supports and does not interfere with organisational goal achievement.
2) Pervasiveness is how widely a culture is held by an organisation’s members.
3) Strength relates to how much members accept values and other aspects of culture.
We can’t see culture (values, assumptions, beliefs, norms of behaviour i.e. how people behave), so we have to work out what it is from symbols, stories, rites and ceremonials (Kinicki & Williams, 2009 in Bartol et al, 2011).
Symbols are objects, acts, events or words used within an organisation that convey meaning.
Stories are narratives based on true events that highlight heroes, heroic efforts, key messages, major blunders and crisis handling.
Rites, rituals and ceremonials: Rites are elaborate, dramatic, planned sets of activities which communicate cultural values to participants, usually in an audience. Rituals are standardised behaviours such as staff, monthly or annual awards meetings, handshakes or business card exchange.
Ceremonies are systems of rites performed at a single event e.g. a graduation ceremony.
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12. Different ways to describe culture
Strong versus weak
Unhealthy versus healthy
Adaptive, entrepreneurial, operator, engineering, executive
Using Animal metaphors
Ways to describe culture
There are many different ways to describe an organisation’s culture. This is important because the concept of culture is difficult to explain. Each type of culture will be explained on the following slides.
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13. Strong versus weak cultures
Clear, explicit principles, values and behavioural norms
Time spent communicating relevance and importance of values
Deeply rooted, unchanging culture
Majority accept culture
Weak culture
Lack of commitment to common values
Development of subcultures
Lack of corporate identify
This slide summarises the discussion on p.52 of Bartol et al, (2011).
In a strong culture there are clear guidelines about the norms expected of the group members. Time is spent communicating why these are relevant and important. As a result they are widely accepted and deep rooted.
Conversely in a weak culture, there appear to be no common values/norms, lots of groups of people with their own subcultures and a general lack of one corporate identity.
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14. Can you think of any organisations like this?
Unhealthy Cultures
Highly political environment
Hostile to change from within and out
May become arrogant and overconfident after successes
May lose sight of market and its needs
‘Organisations with unhealthy cultures have highly politicised internal environments’ (Bartol et al, 2011, p.52).
Can you think of any organisations like this?
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15. Operator, Engineering and Executive Cultures
Actions of organisation are actions of people
Work collaboratively, value communication, trust and commitment
Engineering
Assumes engineers like puzzles and problems & ‘people free’ solutions
Safety oriented, prefer linear, simple, cause-and-effect quantitative thinking
Executive
Organisations financial health is the most important thing
Focus on financial survival and growth of organisation
This slide outlines the differences between operator, engineering and executive cultures. Whilst large organisations may have many cultures, particularly in different departments, it is usually one type that dominates overall. ‘Organisational failure occurs when cultures are unaligned. Generally, operator and engineering cultures do not align with executive culture’ (Bartol et al, 2011, p.54).
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16. Line’s (1999) Animal Metaphors
Description
Lion
Field leader, dominating area without much effort
Eats others when needed but mainly relaxed
Chimpanzee
Individuals are very aggressive
Cooperate with each other to survive but ongoing power struggles
Gorilla
Gentle, playful, non-aggressive and cohesive
Few internal conflicts
Wolf
All members obey the leader at all time and are loyal
Here are four of Line’s animal metaphors that he used to describe an organisation’s culture (1999 in Bartol et al, 2011).
What sort of organisation do you work for?
What sort of organisation do you work for?
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17. LO7 Two cultures and their impact on innovation
Adaptive entrepreneurial organisations tend to ‘create and nurture a culture that can adapt rapidly to changing .. business conditions, [and] they make a point of staffing their organisations with people who are proactive, who rise to the challenge of change and who have an aptitude for adapting” (Thompson et la in Bartol et al, 2011, p.53).
In contrast, bureaucratic organisations believe they have little influence over the environment and prefer not to change. Innovation is therefore not valued.
In complex, rapidly changing environments, adaptive organisations fare better because they embrace change whereas administrative cultures are slow to change.
Sometimes organisations want to change but don’t think they have the ability to do so.
Whole industries can also have a cultural norm. For example, one could argue that to be a major player in the laptop computer industry requires an adaptive and entrepreneurial organisational culture.
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18. LO8 Changing organisational culture
Surfacing actual norms
Articulating new directions
Establishing new norms
Identifying culture gaps
Closing culture gaps
What are the underlying assumptions here?
Changing culture is difficult, particularly if it is a strong culture that is well established and accepted by the majority. One process to try and bring about change is suggested here (Kilmann 1985 in Bartol et al, 2011, p.55).
Surface the norms i.e. in a workshop getting employees to list the organisational behavioural norms that they think influence their attitudes and actions.
Articulating new directions i.e. getting the employees to discuss the organisation’s present direction and the behaviours needed for organisational success.
Establishing new norms i.e. the employees develop a list of new norms that will have a positive impact on organisational effectiveness.
Identifying culture gaps i.e. identifying next gaps between the actual norms and those that are needed to enhance organisational effectiveness.
Closing the gap i.e. agreeing on new norms and ways to reinforce them e.g. developing reward systems and encouraging members to follow the new norms.
The underlying assumptions here is that employees want to change and are placing the organisational goals ahead of their own. These are big assumptions.
In an extreme case, senior managers may seek to ‘convince members that a crisis has occurred or is likely. Next, they communicate a vision of a new organisation direction or strategy. Finally, they motivate others to lead in implementing the vision and the corresponding strategy, including the requisite cultural changes’. (Bartol et al, 2011, p.56).
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19. Conclusion
An organisation cannot survive without understanding its environment (external and internal).
External environments include:
The mega (or general) environment which the organisation has little influence over .
The task (or immediate) environment which the organisation can influence.
In this chapter, the internal environment refers only to the culture of an organisation which can be described in a number of ways – weak/strong; unhealthy; using animal metaphors etc.
Research suggests success comes through aligning environments.
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