In my last post I wrote about the significance of a company’s organizational domain and understanding the company’s specific environment. In addition, however, each organization, regardless of its business activities and related organizational domain, must operate and survive within a broad general environment that includes forces that will eventually impact the ability of every organization within that environment to obtain the resources required for their activities. The following is a brief description of some of the more important and common general environmental forces:
Economic forces, which might include interest rates, exchanges rates, wage levels, GDP, per capita income, unemployment rates, and other indicators of the general health and condition of the economy have a direct and significant impact on the demand for the products and services of organizations and the prices that must be paid in order for organizations to obtain necessary resources (e.g., raw materials and personnel). Differences between countries with respect to certain of these key economic indicators can have a dramatic impact on choices that companies make when designing their organizational domains. For example, it is now common for US companies of all sizes to outsource manufacturing and other activities to foreign countries where the relative costs of labor and/or raw materials are lower and, in fact, outsourcing to reduce costs has become an essential strategy for remaining competitive in global marketplaces.
Technological forces, which might include development of new technologies that will ultimately lead to new products and services, more efficient production techniques, and new methods for accelerating communications and exchange of data, will always have a significant and often sudden impact on how organizations operate. A complicating factor for US companies is that more and more new technologies are being developed outside of the US and US companies must learn how to identify breakthroughs in foreign markets and transfer them into their own organizations so that they can be used to remain competitive.
Political and environmental forces, which might include laws and regulations, politically-driven governmental policies, and pressure from special interest groups, may impact how organizations will need to interact with governmental agencies. A simple example is how companies have been forced to address concerns raised by environmental interest groups regarding how certain products may adversely effect the environment. In many cases, companies have been forced to invest significant amounts in redesigning products or packaging to reduce pollution or solid waste and this has typically required modifications in the relationships that these companies have with key stakeholders such as customers and suppliers. In some instances the need to respond to special interest groups has caused companies to join forces, albeit temporarily, with competitors in an effort to counterbalance the resources that the interest groups might be using to influence public policymakers. Political forces are obviously relevant to companies as they expand globally since foreign countries may regulate inbound foreign investment and/or establish and enforce import and export controls in order to manage the impact of foreign investment on their local economies.
Demographic, cultural and social forces, which might include age, level of education, customs and values, lifestyle, and religious beliefs within a particular country or geographic territory, will determine the business methods and practices in the country or territory and impact how a company must relate to key stakeholders—customers, employees, suppliers, distributors and regulators—in those countries and territories. These forces will determine what products and services might be most popular in a particular country and the attitudes of customers regarding products and services that are imported from the US and other foreign countries. With respect to how business is conducted in foreign countries, US companies must be mindful of how local culture, customs and values shape attitudes toward business practices that might be considered corrupt in the US yet are seen as acceptable in the foreign country. Culture may also impact how local companies comply with financial reporting requirements and will also influence the role that local labor unions play in relations between managers and employees.
While the general environmental forces described above will ultimately impact every element of a company’s specific environment they are particularly relevant to the selection of products and services and the target customer base. Since emerging companies are typically launched to create and exploit some type of technology-based competitive advantage their business models are particularly sensitive to technological forces. As a result, it is not surprising to see that emerging companies tend to make technology-related activities a priority in the business planning process and are more likely to dedicate resources to technology planning and forecasting at a very early stage of the company’s development. Economic, demographic and cultural forces are also important factors for emerging companies looking to launch new products and services in dynamic industries such as communications and entertainment. Finally, if the founders believe that a potential product or service will have a global market they must carefully consider cultural and political factors in key foreign markets before the initial design of the product or service is completed to ensure that it can be easily and efficiently rolled out with minimal additional expense and effort to localize the product or service for successful entry in foreign markets.