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The External Environment’s Effect – It’s Different and It’s Not

When we think of an organization’s external environment and how it influences a company’s day-to-day actions, it is clear that each company will face unique opportunities and challenges as they respond to their external environment.

For example, the needs of a mom ‘n’ pop shop selling regional goods in rural Northern British Columbia vary greatly with the needs of Lululemon, operating in hundreds of locations internationally.

Despite their differences, if we zoom out and look at the bigger picture, we will see that actually there are some common trends for these two companies. As discussed in Chapter 1, all companies need to be aware of how the company is affected by its customers, its competitors, its suppliers, socio-cultural influences, the environmental/natural needs and effects, the political context, legal factors, technological needs and trends, and the economy. All companies need to be aware of these influences and ready to adapt as needed.

For the mom ‘n’ pop shop selling regional wares in Northern British Columbia, the customers, competitors, and suppliers will be easier to identify, and it will be simpler to understand how they influence what the company should do compared to what Lululemon would need to know and understand about its customers, competitors, and suppliers. So, while they share needs in similar areas, the level of complexity and uncertainty that they face in each of these things differs. In this chapter, we will take a deeper dive into the common external forces influencing companies, discuss how to find opportunities and recognize threats from the external environment, unpack how complexity and uncertainty influence business, and analyze how all of the above can impact the way a company should be designed and operate.

Common External Forces

In Chapter 1, we built an understanding of the business’s:

• Participants – the people who participate in conducting the work of the business.
• Stakeholders – those affected by the business’s operations and its decisions.
• External Environmental Influences – external environmental factors that influence what the company does and how it does it.

As illustrated in Figure 6.1, there is an overlap between these three groups. As an example, existing suppliers can be stakeholders and participants. What’s more, because they act independently from the organization, suppliers can also be external environmental influences. Before you move on, take a moment to review Figure 6.1. Specifically, test yourself by:

• defining each key term;
• identifying each term as a participant, stakeholder, function, or external influence (remember some can be more than one); and
• providing an example of why each term is important to a business.

Figure 6.1 The Organization’s Landscape

What We Need to Know About External Environmental Factors

As we explore the business’s external environmental factors, it is important that we understand the levels at which these factors can be considered and common ways that these factors influence businesses.

Levels of Factors

When considering the external environmental factors impacting a business, it is important to note that there are levels at which these influences occur:

• local – the community level;
• regional – the level that is the combination of communities;
• provincial – the provincial/state level which includes multiple regions;
• national – the federal level;
• regional (global) – the combination of multiple nations; and
• global – the worldwide level.

To get an understanding of how the levels affect each company differently, let us use our example companies from the introduction to illustrate the levels of influences that impact them the most. Table 6.1 shares a brief example of each influence. This table just highlights quick examples, but going deeper could reveal many more. As you look at these, bear in mind that the external environmental factors are entirely outside the control of the business.

As evident in the comparison in Figure 6.6, a company’s focus depends on how it operates. Namely, a large multinational corporation will have to focus on many local, regional, provincial, and even national considerations, while keeping its eye on its global region and the overall global trends. On the other hand, the local Mom ‘n’ Pop shop needs to focus deeply on one local area and region most of the time and be aware of national, global region, and global trends. The demands of the company differ, but the factors remain the same – political, economic, social and cultural, legal, technological, and natural/environmental.

Common Influences of the Environmental Factors

When looking at the political, economic, social and cultural, legal, technological, and natural/environmental factors, common influences emerge. This, in turn, makes it easier for the business owner to understand how to pay attention to these factors and understand their impact on their business.

Finding Opportunities and Recognizing Threats

Because external environmental factors cannot be controlled by the business, it is common for the business to focus on the negative impact that a company experiences as the result of a change in its external environment. However, each external environmental factor produces both opportunities and threats. Common opportunities and threats are identified in Table 6.2 below.

Figure 6.7 Common Opportunities and Threats from the External Environment

(move the slider left to right to compare the opportunities and threats)

Now, it is time to apply these concepts. For the two companies that we have discussed so far, sort between the opportunities and threats.

Exercise 6.1 Put to the Test – Opportunity or Threat?

If Exercise 6.1 was challenging, it might be time to review Figure 6.8 and/or use the hints in Exercise 6.1.

Understanding the Role of Uncertainty and Complexity

In this section, we will discuss the role of complexity and uncertainty . Specifically, we will try to answer the following questions.

1. What is complexity and how does it influence the business’s approach to the external environment?
2. What is uncertainty and how does it influence the business’s approach to the external environment?
3. Why do companies need to be aware of uncertainty and complexity?

Complexity

In considering complexity, it is perhaps easier to compare again our two sample companies – the Mom ‘n’ Pop Shop and Lululemon. Through this comparison, the two sides of the complexity spectrum become clearer.

As illustrated in Figure 6.8, companies in a simple environment require only a basic to general understanding of most factors, whereas companies in a complex environment require specialized knowledge, often in multiple areas and at multiple levels.

Uncertainty

When there is uncertainty in its environment, a company has factors that change frequently, and often unpredictably. As the focus moves to uncertainty, we can again rely on our two companies to clarify what companies look like in stable versus unstable environments.

What Is the Impact of Complexity and Uncertainty?

The impact of complexity and uncertainty, while illustrated in Tables 6.2 and 6.3, is more than just what the business needs to focus on. It is also about the capabilities that the business needs to develop. Some of the best-known businesses, including Airbnb, Uber, and Groupon, began as startups during the Great Recession in the mid-2000s. Their success demonstrates that it’s possible for startups to achieve incredible growth, even during uncertain times.

• In complex and uncertain environments, organizations need to be astute to see what is happening and understand the trends, as well as nimble enough to change with the ebb and flow of the environment.
• In simple and stable environments, organizations need to build best practices to increase efficiency, but also be aware of major changes on the horizon. They need to get information and use it quickly to stay ahead of the competition that usually has access to the same information.
• In moderately complex and moderately stable environments, organizations are constantly balancing efficiency with adaptability in order to build practices that allow for cost savings, but that can be changed as trends change.

These differing needs lead us to the conclusion that one size does not fit all. In fact, each organization needs a design that is uniquely suited to meet the needs of its environment. We will pick this idea up again in Chapter 10 – Structuring Organizations. Until then, the three examples above should help with the main archetypes.

Comprehension Check

1. Define the following terms:
   • participants;
   • stakeholders;
   • external environmental factors;
   • complexity;
   • uncertainty;
   • opportunities; and
   • threats.
2. List and define the levels of the external environment.
3. List and define the key factors in the external environment.
4. Give three examples of common opportunities and three threat examples that arise in the external environment.
5. Explain how uncertainty and complexity affect organizations.
6. Describe what an organization should focus on in a:
   • complex and uncertain environment;
   • simple and stable environment; and a
   • moderately complex and moderately uncertain environment.