What is the External Environment and Why is it

important?
Because we live in a “connected” world, managers need to be aware of the impact of the external
environment on their organization. The term external environment refers to factors, forces, situations,
and events outside the organization that affect its performance. The economic component encompasses
factors such as interest rates, inflation, employment/unemployment rates, disposable income levels,
stock market fluctuations, and business cycle stages. The demographic component is concerned with
trends in population characteristics such as age, race, gender, education level, geographic location, and
family composition. The technological component is concerned with scientific or industrial innovations.
The sociocultural component is concerned with societal and cultural factors such as values, attitudes,
trends, traditions, lifestyles, beliefs, tastes, and patterns of behavior. The political/legal component
looks at federal, state, and local laws, as well as laws of other countries and global laws. It also includes
a country’s political conditions and stability. The global component encompasses those issues (like a
volcano eruption, political instability, terrorist attack, etc.) associated with globalization and the world
economy. Although all these components potentially constrain managers’ decisions and actions, we’re
going to take a more in-depth look at just two—economic and demographic

Components of the External Environment

Political/Legal Sociocultural
Demographics Technological
Economic Global
After several years in crisis mode, the U.S. economy and other global economies seem to have turned
the corner. However, it’s not now, nor will it ever be, smooth sailing in the economic arena for
managers. After all, when you’re dealing with important factors such as jobs, incomes, prices of natural
resources and consumer goods, stock market valuations, and business cycle stages, managers have to
pay attention to those that could constrain organizational decisions and actions.

Here’s a quick overview of some of the more interesting characteristics of today’s economy that have
the potential to influence a manager’s planning, organizing, leading, and controlling:

• The slowdown in productivity has moderated globally although it continues to lag in the United States.
Productivity (how much a worker produces in an hour) is an important measure of how well an economy
is doing. Factors that affect productivity include types and pace of innovation, changes in work practices,
technology, levels of workforce education/ training/skill, etc.

• Global trade grew strongly from the late 1970s through 2008, when it collapsed during the last global
recession. However, recent indicators show global trade inching up, with the strongest growth in Europe
and Asia.
• Total U.S. employment is up. The 4.1 percent unemployment rate has held steady and is at the lowest
level in years.8 Workers are benefiting from broad-based gains in income and employment for over a
decade.9 • Many U.S. workers, while employed in a steady job, may not have a reliable income.

Economic Inequality and Economic Context

Why has Economic Inequality become so sensitive? After all, individuals who worked hard, took risks,
and were rewarded because of their hard work or creativity have long been admired. And yes, an
income gap has always existed. In the United States, that gap between the rich and the rest has been
much wider than in other developed nations for decades and was accepted as part of our country’s
values and way of doing things. However, our acceptance of an ever-increasing income gap may be
diminishing.

In terms of Economic Context, the underlying is that business leaders need to recognize how societal
attitudes in the economic context also may create constraints as they make decisions and manage their
businesses.

Sharing Economy
Lastly, in this section on the economy, we want to take a look at an interesting phenomenon taking
place in the United States and around the globe—the sharing economy.

What is the sharing economy? It’s an economic environment in which asset owners share with other
individuals through a peer-to-peer service, for a fee, their underutilized physical assets (such as a home,
car, clothing, tools, or other physical assets). Some analysts have included the sharing of knowledge,
expertise, skills, or time, as well.

The concept behind the sharing economy is putting underutilized assets to good use. Asset owners “rent
out” assets they’re not using to consumers who need those assets but who don’t want to, or who can’t
afford to, purchase them.

What role do Demographics play?

Demographics—the characteristics of a population used for purposes of social studies—can and do have
a significant impact on how managers manage. Those population characteristics include things such as
age, income, sex, race, education level, ethnic makeup, employment status, geographic location, and so
forth—pretty much the types of information collected on governmental census surveys.

Age is a particularly important demographic for managers. Why? Because the workplace
often has different age groups all working together. Baby Boomers. Gen X. Gen Y. Gen Z. Ever heard or
seen these terms? They’re names given by population researchers to four age groups found in the U.S.
population.
 - Baby Boomers are those individuals born between 1946 and 1964.
- Gen X is used to describe those individuals born between 1965 and 1977.
- Gen Y (or the “Millennials”) is an age group typically considered to encompass those individuals
born between 1978 and 1994.
- Gen Z is the youngest identified age group. Although demographers don’t agree on the exact
range of birth years for Gen Z, most group them as being born between 1995 and 2010.

How does the External Environment affect

Managers?
Knowing what the various components of the external environment are and examining certain aspects
of that environment are important for managers. However, understanding how the environment affects
managers is equally as important.

Jobs and Employment: As any or all of the external environmental conditions change, one of the most
powerful constraints managers face is the impact of such changes on jobs and employment—both in
poor conditions and in good conditions.

Assessing Environmental Uncertainty: Environmental uncertainty refers to the degree of change,

predictability of change, and complexity in an organization’s environment.

The first dimension of uncertainty is the degree of unpredictable change. If the components in an
organization’s environment change frequently and the change is unpredictable, it’s a dynamic
environment. If change is minimal and predictable, it’s a stable one.

A stable environment might be one in which there are no new competitors, few technological
breakthroughs by current competitors, little activity by pressure groups to influence the organization,
and so forth.

The other dimension of uncertainty describes the degree of environmental complexity, which looks at
the number of components in an organization’s environment, how similar the components are, and the
extent of the knowledge that the organization has about those components.

An organization that has few competitors, customers, suppliers, or government agencies to deal with, or
that needs little information about its environment, has a less complex and thus less uncertain
environment.

Environmental Uncertainty Matrix

Cell 1

- Stable and predictable environment

- Few components in the environment
- Components are somewhat similar and remain basically the same
- Minimal need for sophisticated knowledge of components
Cell 2
- Dynamic and unpredictable environment
- Few components in the environment
- Components are somewhat similar but are continually changing Minimal need for sophisticated
knowledge of component

Cell 3
- Stable and predictable environment
- Many components in the environment
- Components are not similar to one another and remain basically the same
- High need for sophisticated knowledge of components

Cell 4
- Dynamic and unpredictable environment
- Many components in the environment
- Components are not similar to one another and are continually changing
- High need for sophisticated knowledge of components

Managing Stakeholders
How does Amazon continue to enter and dominate ever-widening markets? One reason is that it
understands the importance of building relationships with its various stakeholders: customers,
advertisers, shippers, and suppliers.

Stakeholders are any constituencies in an organization’s environment that are affected by that
organization’s decisions and actions. These groups have a stake in or are significantly influenced by what
the organization does. In turn, these groups can influence the organization.

For example, think of the groups that might be affected by the decisions and actions of Starbucks—
coffee bean farmers, employees, specialty coffee competitors, local communities, and so forth. Some of
these stakeholders, in turn, may impact the decisions and actions of Starbucks’ managers.

Organizational Stakeholders
Employees Customers

Unions Social and Political Action Groups

Shareholders Competitors

Customers Trade and Industry Associations

Suppliers Media Governments