3.2 The Relationship between an Organization and its Environment

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 Panera Bread, for example, the environment contains its customers, its rivals such as Chipotle and Starbucks, 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 competitive environment for a business down into two components: the general environment and its industry. The general environment, or macro-environment, 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 change 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. For instance, McDonalds’s transition to cage free eggs by 2030 may impact the entire US supply chain for eggs because McDonalds alone purchases approximately 4% of all eggs produced annually, but only 10% of the eggs produced in 2018 were cage free. However, 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. Panera Bread, for example, simply would cease to exist without the employees that operate its stores, the suppliers that provide food and other necessary inputs, and the customers who provide Panera Bread 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, the trends toward obesity in the US and the need for healthy eating helped Panera Bread position itself as a healthy alternative to traditional fast-food restaurants. Threats are events and trends that may undermine an organization’s performance. Panera Bread 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 Panera Bread, but they could grow to become substantial threats to Panera’s positioning as a healthy eatery. Panera Bread and other firms must deal with the uncertainty and other impacts of COVID with could threaten this industry for a long period.

Blue car driving through a recently flooded area in Bangkok, Thailand.
Figure 3.2: Natural disasters devastate many organizations.

Executives also must 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 benefited in the wake of this tragedy.

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% might struggle to achieve this goal during an economic recession or if several new competitors enter its market. Environmental conditions also need to be taken into account when examining whether to start doing business in a new country, acquire another company, or launch an innovative product, to name just a few.

Key Takeaway

  • An organization’s environment is a major consideration in strategic assessment. The environment is the source of resources that the organization needs. It provides opportunities and threats, and it influences the various strategic decisions that executives must make.

Exercises

  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 organization can influence?

References

Nowak, S. (2018, October 22). McDonalds announces its making the transition to cage free eggs. Organic Authority. https://www.organicauthority.com/buzz-news/mcdonalds-announces-its-making-the-transition-to-cage-free-eggs.

Image Credits

Figure 3.2: Kim Seng. Monthly Newsletter-November 2011. CC BY-NC-ND 2.0. Retrieved from https://www.flickr.com/photos/captainkimo/6356997605.

License

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Strategic Management by Reed Kennedy is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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