What are the consequences of not understanding the external environment in managing organizations?
The most extreme consequence is complete failure of the organization to maintain a viable presence. There are five major components of external environment of which all businesses must be cognizant; competitors, the economy, social systems, monetary systems, political and environmental systems.
Competitors' actions affect the ability of a business to make profits because of the direct competition. External competitors will seek to modify their products or slander an organization's products to gain market share. In any business environment there is a finite market share available and all competitors vie for it through advertisements, product improvement or innovation. An organization cannot allow a competitor to gain too much market share without suffering catastrophic profit loss.
The economy is the manner by which resources are allocated. Resources can include raw materials for production or people for operating machinery. Every economic system goes through periods of expansion and reduction. Failing to properly prepare for these fluctuations leaves a company vulnerable to shortages of critical supplies. Competitors will quickly seize upon the opportunity to gain market share.
The social system is the fabric of ideas and behaviors exhibited by consumers. Their opinions should matter to an organization because they are the ultimate consumer of production. When businesses produce or are perceived to produce a product damaging to society, consumption can wane. Businesses must be flexible in their approach to advertisement and use of materials in production to satisfy social trends.
Monetary activity relates to spending and borrowing between businesses in the economy. Organizations that overextend credit place themselves in a precarious position by having too much debt compared to income. This can lead to bankruptcy.
The political and legal systems are driven by the social system and often reflect the current attitude of consumers. Organizations must monitor for laws or governmental decisions impacting their production. Violations of monetary statutes can also damage the company financially.
The environmental system is the system of life. Natural weather occurrences can alter or damage equipment, destroy supply lines or decrease personnel. An organization must ensure it is protected from natural events.