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Table of Contents

Table of Contents

3.1 The Relationship between an Organization and Its

Environment

L E A R N I N G O B J E C T I V E S

1. Define the environment in the context of business.

2. Understand how an organization and its environment affect each other.

3. Learn the difference between the general environment and the industry.

What Is the Environment?

For any organization, the environment consists of the set of external conditions and forces that have

the potential to influence the organization. In the case of Subway, for example, the environment

contains its customers, its rivals such as McDonald’s and Kentucky Fried Chicken, social trends such as

the shift in society toward healthier eating, political entities such as the US Congress, and many

additional conditions and forces.

It is useful to break the concept of the environment down into two components. The general

environment (or macroenvironment) includes overall trends and events in society such as social

trends, technological trends, demographics, and economic conditions. The industry (or competitive

environment) consists of multiple organizations that collectively compete with one another by

providing similar goods, services, or both.

Every action that an organization takes, such as raising its prices or launching an advertising campaign,

creates some degree of changes in the world around it. Most organizations are limited to influencing

their industry. Subway’s move to cut salt in its sandwiches, for example, may lead other fast-food firms

to revisit the amount of salt contained in their products. A few organizations wield such power and

influence that they can shape some elements of the general environment. While most organizations

simply react to major technological trends, for example, the actions of firms such as Intel, Microsoft,

and Apple help create these trends. Some aspects of the general environment, such as demographics,

simply must be taken as a given by all organizations. Overall, the environment has a far greater

influence on most organizations than most organizations have on the environment.

Why Does the Environment Matter?

Understanding the environment that surrounds an organization is important to the executives in

charge of the organizations. There are several reasons for this. First, the environment provides

resources that an organization needs in order to create goods and services. In the seventeenth century,

British poet John Donne famously noted that “no man is an island.” Similarly, it is accurate to say that

no organization is self-sufficient. As the human body must consume oxygen, food, and water, an

organization needs to take in resources such as labor, money, and raw materials from outside its

boundaries. Subway, for example, simply would cease to exist without the contributions of the

franchisees that operate its stores, the suppliers that provide food and other necessary inputs, and the

customers who provide Subway with money through purchasing its products. An organization cannot

survive without the support of its environment.

Second, the environment is a source of opportunities and threats for an organization. Opportunities

are events and trends that create chances to improve an organization’s performance level. In the late

1990s, for example, Jared Fogle’s growing fame created an opportunity for Subway to position itself as

a healthy alternative to traditional fast-food restaurants. Threats are events and trends that may

undermine an organization’s performance. Subway faces a threat from some upstart restaurant chains.

Saladworks, for example, offers a variety of salads that contain fewer than five hundred calories.

Noodles and Company offers a variety of sandwiches, pasta dishes, and salads that contain fewer than

four hundred calories. These two firms are much smaller than Subway, but they could grow to become

substantial threats to Subway’s positioning as a healthy eatery.

Executives must also realize that virtually any environmental trend or event is likely to create

opportunities for some organizations and threats for others. This is true even in extreme cases. In

addition to horrible human death and suffering, the March 2011 earthquake and tsunami in Japan

devastated many organizations, ranging from small businesses that were simply wiped out to corporate

giants such as Toyota whose manufacturing capabilities were undermined. As odd as it may seem,

however, these tragic events also opened up significant opportunities for other organizations. The

rebuilding of infrastructure and dwellings requires concrete, steel, and other materials. Japanese

concrete manufacturers, steelmakers, and construction companies are likely to be very busy in the years

ahead.

Third, the environment shapes the various strategic decisions that executives make as they attempt to

lead their organizations to success. The environment often places important constraints on an

organization’s goals, for example. A firm that sets a goal of increasing annual sales by 50 percent might

struggle to achieve this goal during an economic recession or if several new competitors enter its

business. Environmental conditions also need to be taken into account when examining whether to

start doing business in a new country, whether to acquire another company, and whether to launch an

innovative product, to name just a few.

K E Y TA K E AWAY

An organization’s environment is a major consideration. The environment is the source of

resources that the organizations needs. It provides opportunities and threats, and it

influences the various strategic decisions that executives must make.

E X E R C I S E S

1. What are the three reasons that the environment matters?

2. Which of these three reasons is most important? Why?

3. Can you identify an environmental trend that no organizations can influence?