The External Environment
Running head: THE EXTERNAL ENVIRONMENT 1
THE EXTERNAL ENVIRONMENT 4
The External Environment
The External Environment
The Organization and Its Environments
Chinese economy growth has stagnated at 9% since 1970. China switched from a centralized to a more open market system to attract investments. Chinese economic development is also driven by a strong local market with a population of 1.3 billion people also creating cheap labor. However, China faces several challenges such as rising demand for fuel, population increase and government control. Chinese economic environment is subjected to several external forces affecting the performance of active companies. The environment of the company consists of the broad environment and the task environment.
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The Broad Environment
The broad environment involves global forces that affect investments in the global market. Several forces influence the broad environment of an organization, including technological, economic, socio-cultural and political or legal. Individual firms lack the financial and market strength to influence control forces in a broad environment mandating them to set strategic policies to counter the threats. As an example, Intel has been able to influence the global production of microcomputers and smart devices but it is a rare case. Managers are required to analyze threats in the broad environment and convert them into advantages. Socio-cultural forces create unique challenges and opportunities for business organizations. Socio-cultural forces in the United States include illegal drugs, poor quality education, abortion, health care, immigration laws, terrorism, Internet, environmental pollution, military and foreign investments. Business companies aiming at success in the US market must evaluate and understand these socio-cultural factors and positively integrate each of them in the company culture. Analyses of the socio-cultural trends are important considering four main factors: first, organizational shareholders are members of the host society. Their values and beliefs highlight forces that are active in their society that influence their spending decisions creating threats or opportunities for organizations. For example, health and fitness awareness campaigns equal business opportunities for health supplements and fitness equipment companies. However, tobacco firms have suffered economic backlash due to the same socio-cultural trend. Three other factors mandate companies to evaluate the socio-cultural forces that are to maintain positive brand image, avoid legal backlash and understand the demographic change in the society. Economic forces exalt the greatest influence on business organizations performance by controlling consumers demand for services and products. Economic forces include foreign trade balance, exchange rates, credit availability, competition and inflation. For example, inflation increases interest rates and the cost of fuel leading to losses and the collapse of trucking companies. Foreign exchange rates affect the profitability of companies as profits earned in a country with a weak currency translate to negligible profits when converted to a stronger currency. Forecasting and evaluating the economic forces in the global market is vital to determine the economic performance of global firms. Trends in technology change overnight as firms introduce new and unique products and services. Technology has a major influence over the society, making it an important factor for organizations to analyze and tap to their advantage. For example, the Internet, smart devices and computers have revolutionized communication, leisure, sports and traveling. The failure of an organization to adopt trending technologies results in its poor efficiency and productivity. Technological advances cut across all industries including advertising, telecommunication, health and sports. Companies can mitigate future threats and utilize opportunities by monitoring and adopting economically viable technologies. Host governments and legal institutions develop and implement rules that affect the operation of business organizations. Business organizations ensure good relations with host authorities by ensuring adherence on set legal policies. Governments provide tax incentives and subsidiaries to boost companies, on the other hand, close non-compliant organizations. In the United States, the government has provided incentives to save the US banking system and automobile companies including General Motors. The government also holds strong legal control over the food and drugs industries through a bundle of regulating rules due to health concerns. Understanding of the legal and political forces enables companies to foster good relations with regulating authorities and avoid legal penalties and negative public image.
The Task Environment
The task environment consists of stakeholders who are in regular contact with the organization. Stakeholders include competitors, activist groups, government agencies, local community, customers and financial partners. Harvard University economic researcher Michael Porter identified customers, suppliers and competitors as the biggest influences in the task environment. Competitors form three categories that are potential, existing and indirect competitors. The exalted by potential competitors depends on market barriers such as legal policies, customers loyalty, capital availability and dormant players. Indirect competitors introduce products that can substitute or offer the same service to the customers leading to lower demand for the original product. Substitutes favor consumers by lowering the market price and increasing market availability of the product. Porter identified five major factors that influence the nature and level of competition in the business environment. The factors are the substituting products, barriers to entry competitors, customer base, dependability of suppliers and forces controlling the strength existing competition. Porter also analyzed the power of customers on organizations. He highlighted that the power exalted by customers on an organization depends on several conditions. They include companies with low customer base that suffer profit losses when few customers withdraw or switch to another seller. Customers ability to integrate to suppliers and similarity of products affect customers loyalty to an organization and affect performance. Economic capability of customers and access to product information also influences the purchasing power of consumers and organization performance. Suppliers provide raw materials, equipment and labor. Suppliers easily influence the profit margins in organizations such as retail stores by controlling the supplying prices. They also determine the delivery time and quality of goods, therefore, exalting influence over retail stores performance.
Social Networks and Partnerships
Social networks and partnerships enable global firms adapt to threats in the market environment such as competition, capital and legal policies. Global firms engage in research collaborations and joint ventures enabling them to mitigate risks and threats. Social networks and partnerships enable firm to tap to shareholders resources such as finance, management knowledge and political power.
Global Business Environments
Successful business organizations evaluate several aspects of foreign investment environments before deploying resources. Forces include economic, socio-cultural, legal and technological aspects. Governments support and recovering of global economy provides numerous opportunities to organizations willing to take risks.
Competitive Advantage of Countries
Michael Porter highlights that certain nations have a high level of competition in specific fields compared to others. For example, Germany is a leading producer of luxury cars, while Switzerland and the United States lead in pharmaceuticals and technology respectively. Countries gain market edge by creating conducive environments that attract international investors. Countries owing globally competitive firms share four main characteristics leading to global dominance of their products and services. The first characteristic is factor conditions. It refers to unique endowments available in specific nations such as cheap labor in China, minerals in South Africa and education institutions providing quality education. The second characteristic is demand conditions. It explains consumers control on quality of products forcing competitors to meet set conditions. Success of firms depends on the efficiency of supporting and related players such as suppliers and raw material providers. The fourth characteristic is the structure. Strategy and rivalry, that are present in the nations host environments, determine the success of active firms. Countries with surplus availability may enable firms to grow to global dominance due to the inventive and skilled managers required to run a global franchise reducing the cost of outsourcing. Strong and aggressive competitors in the host environment, such as in the smart devices market, force players to invest in research creating unique products that are able to secure customers loyalty.