I am a student of chartered accountancy, and have good knowledge about organizations, businesses and their management.
The environment of an organization means anything outside the organization which affects how it acts and what it does. The environment plays a very important role in the decision making of the management of an organization. Change in environment can affect profitability and activities organization, the influence of the environment differs according to the circumstances of the organization.
It is the responsibility of the management to monitor developments in the business environment, and to consider how to react to such developments.
How to Analyze Organizational Environment?
One method of analyzing the environmental factors is to group them into 4 main categories namely:
- Political and legal factors
- Economic factors
- Social, cultural and demographic factors
- Technological factors
This method of analyzing the organizational environment is called PEST analysis.
PEST analysis involves considering all the environmental influences on the organization and deciding how to respond to these developments and changes.
Influences can change over time. Understanding the environment should be an ongoing process.
Let’s discuss all of the above-mentioned categories one by one.
Political and Legal Factors
Politics and law have too much influence in business affairs of the organization, changes in laws of the place where the organization is operating, as well as, changes in politics, globally and also of the place where the organization is operating, can lead to changes in organizational activities as well as profitability.
Multinational companies have to deal with additional problems, as they operate in many different countries, they have to plan their activities differently according to their respective environment.
Following are some examples of political and legal factors which might affect the business of the organization:
- Education: In most of the countries, the government is responsible for most of the education system. Education policy affects the skills and knowledge of the workers who make up the workforce of the organization.
- Environmental policy: Different countries have different policies regarding the protection of the environment, and the reduction of pollution in the air, water, and land. Organizations might be affected by the changes in such policies.
- Taxation and subsidies: Governments use taxation to raise income, they might also use it to influence behaviors, such as to reduce the demand of certain products or to increase the demand. Governments sometimes also offer subsidies to encourage particular activities, organizations might be influence by such policies and decisions of governments. Etc.
- Political instability: Business of organization is also influenced by political instabilities, such as civil wars, corruption, etc.
Economics is the study of choices made by individuals and firms. Individuals and societies make use of limited economic resources to satisfy their needs and wants, economical factors might be split into 2 categories:
Macroeconomics: is the study of the total economy or aggregate economy rather than individual buyers and sellers, it is concerned with factors such as level of unemployment, rate of inflation, economic growth, etc.
The activities of an organization are influenced by macroeconomic factors, for example, if there is a high rate of unemployment then the cost of labor will be low, and more labor can be hired. If the rate of inflation is low, then the cost of raw material used by the company to manufacture their products will also be low, more product can be manufactured at a lower cost.
Microeconomics: is concerned with the study of economic choices made by individuals, firms, and how their decisions are influenced by the price, cost, and level of satisfaction.
The decisions made by the management of the organization are influenced by microeconomic factors also, for example, company A is offering good quality laptops at $100 each, after a while company B starts its business of similar laptops, but are selling them for $80, then the demand of company A’s laptops will decline. Company A will have to come up with new ideas to increase the demand for their laptops.
Social, Cultural and Demographic Factors
Social factors in the environment refers to changes in tastes, values, preferences in the society, in the short term they are affected by fashion, demography is concerned with a specific aspect of society, for example, the size, spread, and distribution of society.
Organizations have to consider and respond to changes in society, their preferences and the needs of customers.
If such factors are not considered by the organization, then they will continue to offer products and services which are increasingly less relevant for the needs of customers.
Examples of social and demographic changes are:
- A large number of individuals are concerned about health and weight, interest in healthy eating has increased,
- Large number of people expects to travel to other countries regularly, interest in traveling has increased,
- The trend of online shopping has increased, organizations not offering online services cannot make profits, as much as, those offering online services.
Technology plays a very important role in the success of an organization’s business, if their product is completely technologically updated and is manufactured by using technological advancements, then its effectiveness and quality will be very high.
Organizations have to maintain technological developments in the design and development of products to remain competitive in the market. This factor plays a very important role in the high profitability of the company.
The organizations must consider the changes in the environment, and must respond effectively to those changes, to keep their business profitable and competitive. Changes in the environment can give rise to opportunities, for making more profits or expansion of business, as well as, threats, which might prevent organizations from achieving their objectives.