These elements are general in nature and influence the organizations in an indirect way. These factors are shown as follows:
These factors and their influences are described in more detail.
The economic environment is the overall health of the economic system in which the organizations operate. Key economic influences include factors such as inflation, interest rates, unemployment, disposable income, balance of payments, stage of the economic cycle and so on.
These influences are very strong in affecting a company’s strategies. For example, inflation and the rate of interest affect the availability and cost of capital and thus the ability to expand and grow. These also influence the costs of production, prices to be charged and hence the consumer demand.
Unemployment rates affect labour availability and the cost of labour. Each of these economic factors can serve either as an opportunity or as a threat. Management must always remain proactive so as to exploit the opportunities and where possible, change threats into opportunities.
We are living through the most dynamic organizational environment where technological advancements and breakthroughs are a continuously occurring phenomenon. Accordingly, organizations must the able to respond quickly to new developments and create innovations of their own.
Technological advances create new products, new production techniques and processes and new ways of managing and communicating. Strategies developed on the basis of technological developments create a competitive advantage, and there are numerous examples of companies failing because of delay in adapting to new technological thinking.
Some of the more recent major technological developments that had profound impact on most organizations and society in general are the advent of high speed computers, lasers, microwave, robotics, satellite communications, nuclear power, gene splicing and so on.
Accordingly, organizations must be adaptable to new technologies both for survival’ as well as growth. National Cash Register (NCR), for example, was not well prepared to change from electro-mechanical cash registers and adding machines to electronic substitutes offered by other companies and hence suffered a tremendous competitive disadvantage.
The central role that technological forces play in creating change in the organizational environment is expressed by D.D. Davis, as follows:
“The future is never what it is expected to be. Technological innovation abruptly destroys the present while creating the future. New technologies force organizations to reconsider their purpose and methods of operation. Organizations that do not modify themselves to absorb newly adopted technologies never achieve their technological promise”.
Governments, both central and local, through laws enacted and legislation passed and the governmental regulatory agencies have direct as well as indirect impact on business practices.
For example, the philosophy of business thinking on the part of elected officials has an indirect influence on any given organization. Accordingly, many organizations have lobbyists working on their behalf in influencing legislators to either pass or defeat certain business oriented legislation depending upon whether it helps or hurts the organization.
For example, during President Reagan’s term in office as President of the United States, the political environment was pro-business which resulted in tax breaks for businesses as well as deregulation of transportation, telecommunications, banking industries and so on.
In India, Finance Minister Manmohan Singh brought about tremendous changes in the economic climate of the country through legislation which encouraged competition and collaboration with foreign companies.
For example, there was only one car, “Ambassador,” produced by Hindustan Motors Company for many years, until recently when government legislation allowed foreign car makers to produce and market cars in India, thus allowing for increased competition for quality as well as technological innovation.
The political-legal environment influences businesses and industries, basically, in three ways. First, the legal system defines, to some degree, as to what an organization can and cannot do.
Even though, in the United States, the economy is market driven and capitalistic in nature, there is still significant regulation of business activity. Firms must comply with regulations dealing with hiring practices, tax structures, consumer lending, and safety, advertising, price fixing, and air pollution and so on.
Second, as discussed before, pro-business or anti-business sentiment in government influences business activity. Pro-business sentiment favours businesses in terms of expansion, mergers, and fewer restrictions and so on. Anti-business sentiment has opposite effect. Finally, political stability has ramifications for strategic planning.
This impact is especially significant for multi-national companies. Even in democratically stable countries, such as India, the governmental policies changed when the governing party changed from Congress party to Janta Party in 1977.
Such embedded companies as Coca-Cola and IBM had to close operations in India because of these changed policies. Until recently, American companies were reluctant to do business with India because of unpredictability in governmental policies.
Domestically, in the United States, billions of dollars are spent every year to comply with the government regulations. In 1991, for example, Federal regulations cost the U.S. economy more than 400 billion dollars. According to Warner, “current level of regulation is so high, and so complicated, and so intrusive that it is strangling business and suppressing productivity.”
Accordingly, effective managers must be cognizant of the political and legal factors, current or potential that can have an impact on a particular situation.
Social and cultural practices and changes including the prevailing attitudes, values and ethics influence the organization. Socio-cultural processes are important because they determine the products, services and standards of conduct that are acceptable to society.
For example, beef products are not accepted in Hindu society and pork products are forbidden in Muslim society. Tobacco products are far less acceptable now in America than they were only a few years ago. Cosmetics and fragrances are not allowed to be marketed in Middle East countries.
The management must continue to monitor the changing patterns of social thinking. For example, the work force is becoming more educated and more women are joining the ranks of both blue collar and white collar workers. Accordingly, the generally accepted stereotype role of women being a poor risk or less competent as managers must be radically revised.
Even in India, where traditionally, a woman’s role has been primarily of a wife, a mother and a home maker, tremendous social changes have taken place. Many women are choosing careers over family life and many more are balancing career roles and family roles.
The social demographics have changed considerably over the last few decades. Today’s young adult is more materialistic and spends more on quality items. Women are passionate about health and beauty, thus increasing the market for cosmetics and healthy foods.
People are living longer so that there will be a larger market for organizations which cater to the needs of seniors such as health care products or recreational products. There are fewer babies being born, thus reducing the market for baby products.
The management style has also changed because of these social changes. American businesses are tending more towards participative style of management with more autonomy for workers rather than the traditional authoritarian relationships.
More and more workers are accepting jobs that offer more flexibility, challenge, freedom and self-esteem. This has prompted many organizations to improve the quality of working life in terms of job redesign and improved working conditions.
In more recent years, organizations have become concerned about the preservation of the natural environment. There has been increased public interest in such environmental issues as pollution, energy shortages, wasting of natural resources and these concerns have affected managerial decisions and organizational policies. Emission control in automobile exhaust systems is regulated by law.
Dumping of toxic wastes in unspecified places is prohibited. Paper manufacturing companies are required to plant trees and then cut them to produce paper. The environmental damage created by the Exxon “Valdez” oil spill in Alaska is recorded in history books.
Chemical industries have specially become sensitive to environmental concerns. The Bhopal tragedy is a painful reminder to Union Carbide of the problems caused when controlled substances leak out into the atmosphere.
Environmental concerns are achieving high priority in all aspects of operations and decision making. According to James Post, professor of management and public policy at Boston University, “Environmental issues will be …. a force of such power as to literally transform the way managers manage their businesses and think about the relationship of the firm to its internal and external stakeholders”.
Accordingly, managers are increasingly looking at the new relationship between business activity and our natural environment, especially where depletion of natural resources is concerned so that any further environmental damage is halted.
Organizations which operate in more than one country face even more complex environment because of the uniqueness of environmental factors that characterize any country. Even if an organization is not international in its operations, events in another country can affect the operations of a domestic company.
The oil policies of Middle East countries practically dictate the operations of many organizations in other countries which depend on oil as their main source of energy. Some of the factors to be taken into account in case of multinational companies are the economic conditions in the host country, culture, availability of material and manpower, laws, political stability, regulatory agencies and so on.
As one group of writers states, “the firm must determine how the new environment differs from the more familiar domestic environment and decide how managerial philosophy and practice must be changed.”
Key developments in the international arena of macro environment have been primarily the European economic unity, the fall of socialism and communism and the rise of business activity in the so called Pacific Rim.
Europe is integrating economically to form a formidable economic giant. Twelve nations of Western Europe have joined to eliminate trade barriers among themselves in order to become the third economic superpower after United States and Japan. As a single entity, with a population of 320 million, the European Community (EC) will have a GNP of over four trillion dollars.
This would have a considerable impact on all organizations, domestic as well as international.
The fall of the Soviet Union and economic freedom in China are shifting the economic balance and creating an unprecedented global competition for goods and services. The government run industries in Eastern Europe are being transferred to private owners and all these events are providing new markets for goods and services, new sources of labour and raw materials and potential for new competition. The countries of the Pacific Rim have shown tremendous tenacity in meeting world competition in many types of products, especially the electronic ones. In addition to Japan, the four economically strong countries, known as the “Four Tigers” are South Korea, Taiwan, Singapore and Hongkong.
These “Four Tigers” along with Japan are the major trade partners with the United States. Other countries to watch for in the coming years for economic markets and developments are India and China with nearly half of the world’s population wanting for a better quality of life.