Module 2 - Challenges in The External Environment

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Management 5: STRATEGIC MANAGEMENT

MODULE 2
Challenges in the External Environment

Learning Outcomes

Particularly at the end of this module, the students should be able to:

1. perform environmental scanning;


2. employ SWOT analysis using a company;
3. analyze and evaluate the social, political, economic, technological, and environmental
forces affecting the country; and
4. identify external forces that may prove beneficial or detrimental to an organization.

Scanning the Environment

Organizations exist to survive. Given their vision and mission statements and set goals
and objectives, it is for organizations to conduct themselves clearly, deliberately, and
strategically. To achieve this, organizations should develop "organizational intelligence!'
Organizational intelligence refers to the expertise, insight, and wisdom possessed by an entity.
It serves as a valuable guide to its journey to becoming competitive. Thus, organizations need
to possess this capability to be able to accurately audit the environment and come up with
creative and cutting-edge strategies.

Environmental scanning is the study and interpretation of the forces existing in the
external and internal environments. The external environment includes social, economic,
political, technological, and environmental forces that may influence an organization, an
industry, or any entity. The competitive environment covers competitors, suppliers, customers,
stakeholders, culture, and the government. Environmental scanning is carefully monitoring the
surroundings with the end goal of ascertaining early indications of prospects and challenges
that may influence the organization's present and future plans.

Conducting environmental scanning is both easy and difficult. For informal scanning,
experience and expertise will help make the process effortless and straightforward. The
competencies, skills, and intelligence of the individual will allow for easy scanning of the
environment. On the other hand, environmental scanning can be demanding, in that there is a
need for comprehensive, as well as accurate information. It will be mostly dependent on the
following: (1) the speed of the organization to conduct scanning; (2) the presence and
availability of complete information; and (3) the physical and financial capability to do so.

The External Environment

The external environment today is highly complex. This fundamental paradigm


conspicuously characterizes the global scenario. Nations possess different levels of growth and
development. For example, power relationships have become dynamic, volatile, uncertain,
complex, and threatening. Multifaceted concerns, although distinct, have become primordial
issues among countries, causing differences in policies and global interrelationships.
Oftentimes, an atmosphere of strategic negotiation, compromise, and survival permeates.
Consequently, knowledge of the broad environment is considered an advantage for
organizations when managers constantly develop an audit "intelligence" of the environment.

Specifically, the external environment presents varying forces that influence


organizational direction and strategic decision-making. These forces are social, political,
technological, economic, environmental, and legal in perspective. The confluence of these
forces can present themselves as threats and challenges to organizations. On the other hand,
they could provide valuable opportunities. The analysis of the external environment is referred
to as PEST (Political, Economic, Social, and Technological) Analysis.

Social Forces

Social forces refer to important issues that are characteristic of global and local societies.
Society consists of individuals, families, and communities, including their beliefs, aspirations,
traditions, and practices. Significant societal factors in the environment create varying impacts
on organizations. Some of the more critical social concerns today are changing social structures,
the world's aging population, the great demand for health services, the evolving sophistication
in the lifestyles of people, and the cross-cultural implications of mobility of peoples including
migration, among others.

 Changing Social Structures. The social environment can be better understood and
analyzed in terms of broad social structures. Social structure refers to the network of
social institutions that includes the family and the community. The family is one of the
basic institutions of a social organization. It performs various functions that include
human reproduction, raising up children, and sending them to schools to ensure a
better life in the future. When bound together, families form communities.

Today, social structures are significantly changing. Family sizes are decreasing in
developed countries like Europe and America. In China, the one-child policy has been
strictly implemented and monitored for the last decades, although this law has now
been relaxed. On the other hand, a greater number of underdeveloped countries allow
larger family sizes that bring about accompanying social implications. As a result, there
is a pressing need to provide for a well-balanced family like good education, decent
housing system, acceptable monthly incomes, safety and security in communities, and
more opportunities for livelihood. The interrelationships of these social constructs
describe today's changing communal and shared structures, including marked
differences in universal and collective values, beliefs, morals, and religions.

 Aging Population/Demand for Health Services. There are more maturing and aging
individuals today. Like an inverted triangle, the baby boomers are greater in number.
Baby boomers are individuals born in the 1940s. Today, they are precisely the people
who need more medicine and health services. This reality has fundamental social
implications like the need to provide elderly people with adequate medical care and
community service.

Because of their deteriorating physical and physiological condition, senior


citizens need more doctors, nurses, and caregivers to attend to their curative and health
requirements, and nutritionists to guide them in eating healthful food. They need
psychologists to tend to their emotional needs, adequate medicines to address their
therapeutic and remedial concerns, modern health equipment, and facilities like homes
for the aged to provide them with comfortable welfare dwellings and warm
neighborhood centers to help them get smoothly through the aging process.

 Sophisticated Lifestyles of People. Compared to the past, the lifestyles of people today
have dramatically changed, too. Their way of looking at themselves, the people around
them, their lives and careers, their values, attitudes, philosophies, and expectations
have taken a deeper and wider perspective. They are more demanding, complicated,
varied, and unique. Their priorities, as well as their wants, are continuously changing.
Whereas earlier generations were content with having a simple abode to stay safe,
today the new generation of people want to own houses and live extravagantly. Once
content with simple things, they expect more from life and living.
 Cross-cultural Diversity. Similarly, the global community is getting figuratively smaller.
Workplaces are shifting and people in the global community are either working or
migrating to every part of the world. As a result, cross-cultural diversity has become an
important organizational issue; culture being a basic component of the global
environment. When we speak of multicultures, we consider the culture of the individual
and the host country.

While foreigners bring with them their deep-rooted cultures, beliefs, aspirations,
values, traditions, perspectives, religion, and sense of nationalism, there is a need for
them to also respect the culture of their host country and adjust to its cultural traditions
and idiosyncrasies. Therefore, to promote good multicultural working interrelationships,
flexibility, mutual acceptance, and deference to intra-cultures are necessary.

Political Forces

There are crucial concerns confronting nations today. Geopolitical issues have become
the focus of major political powers. Some of these issues are political independence, changing
governments, balance of power, terrorism, suicide bombings, global alliances, and chemical and
nuclear warfare. These critical problems are affecting the global political balance.

 Political Independence/Changing Governments. Political sustainability has become the


focus and concentration of developed and power-driven countries. They fight wars to
attain and maintain political supremacy. The call for global political equilibrium has
challenged nations to involve themselves in the attainment of global peace and security.
Global ideologies are the main determinants of global support while global power is the
main ingredient of global leadership. Consequently, nations today are undergoing
changes in government: from communism to socialism to capitalism, and from
dictatorship to democracy. More particularly, some colonized territories in the world
are waging their own wars to attain independence. Fighting, dissention, and mayhem
characterize civil wars. The hostilities between and among the protagonists are bloody
and costly. People are killed, families are displaced, and properties are destroyed. These
affect the very core of humanity.

 Terrorism/Suicide Bombings. The bloody and painful transition toward equality of basic
human rights and the right to a better life have brought about critical security problems
like terrorism, kidnappings, suicide bombings, and hijackings. News about wounded and
dead children, elderly citizens, and innocent people have become normal occurrences
heard over radio and seen on television. Kidnappings for ransom have become sure
sources of finances. The fearless and bold attacks by suicide bombers are a brazen
testimony of disregard for law and order.

 Chemical and Nuclear Threats. Some countries go on developing and producing


weapons with the intention of blackmailing and/or intimidating other countries. True
enough, the spread of deadly chemicals, viruses, and other forms of microorganisms
pose dangerous effects. This is likewise true with nuclear military hardware. Nuclear
threat is imminent where countries continue to beef up their nuclear arsenals. Although
nuclear plants are essentially useful in harnessing nuclear energy, their misuse and
abuse are threats to peaceful coexistence. Danger looms and when used
indiscriminately, these long-range and short-range missiles can literally erase the whole
of humanity. In essence, political survival and power are the great determinants of
political decision-making and peaceful coexistence.

 Global Alliances. Politically, nations are aligning themselves for self-preservation and
more so, for global stability and strength. Today, no nation attempts to stand alone
because global relationships are essential to national survival. European nations have
bonded themselves as the European Union. The same is true with ASEAN countries.

Economic Forces

Economic realities have concomitantly come to the forefront. Economic issues greatly
affect the growth and development of a nation. Nations are strategizing to maintain a
continuum of financial stability. Most often, trade and investments are transacted to ensure
monetary security. Economic realities include globalization of products and services, the
presence of aggressive competitors and suppliers, the fall of large and "supposedly" financially
stable organizations, increasing oil prices, economic trade agreements, the emergence of new
markets, and the rise of China as a major economic player in the world.

 Globalization. This is one major determinant of competition. Globalization can be


viewed from four perspectives: products, people, ideas, and money. Before, simple and
traditional goods were generally accepted but today's consumers demand flexibility and
versatility in the products they use.

Multifaceted, multilayered, and multidimensional products and services in the


market are challenging firms to devise ways to meet these recent developments.
Products like computers, appliances, clothes, bags, shoes, and medicines are
manufactured in one country and sold in other countries. Chinese products "go" as far
as Europe while Filipino baby dresses are sold in Africa. Indonesian tables and chairs are
fixtures in Philippine offices while European-branded cell phones are everywhere, even
in North Korea. This is a millennium-manufacturing phenomenon.

Globalization likewise implies mobility of people. People migrate to countries of


their desire. Although the number of global citizens is increasing, a great majority of
peoples leave their own countries to work abroad. The Philippines, as a country, has
created its comparative advantage in the area of human resources, the country being
competitive when it comes to its nurses, caregivers, teachers, seafarers, and
programmers. Similarly, monetary dealings are conveniently transacted electronically
through banks and other financial institutions as far as Cayman Islands. Lastly,
inventions and expertise are no longer limited to a particular nation. Indonesia has
developed a cure for bird flu, while the science of robotics is being experimented and
actualized in Japan. Everywhere, we see individuals with brilliant ideas and discoveries.
Thus, we speak of "globalized" people, money, products and services, and ideas.

 Competitors and Suppliers. Aggressive competitors and creative suppliers compete to


get a larger slice of the market, both energizing the industry and business environments.
Pricing, quality, differentiation, and innovation are the usual criteria for business success
with consumers more likely patronizing less expensive but quality products.

Since quality is a given, it is necessary for survival. Thus, aside from satisfying
minimum quality requirements, organizations should offer differentiated and innovative
products and services to satisfy customers with discriminating expectations. Doing this
creates bargaining power and increases competitiveness and profitability.

 Fall of Financially Stable Organizations. The last few years saw the downfall of a
number of financially successful organizations that were managed by respectable and
competent presidents and chief executive officers. The corporate fiascos of Enron,
World.Com, and the Lehman brothers are but a few examples of the more widely
talked-about financial catastrophes.

 Increasing Oil Prices. The never-ending increases in oil prices have been creating
economic instability in global communities. Characterized by unpredictability in price
and production, organizations using oil and any of its "derivative" products find difficulty
in projecting costs and profit figures. Planned strategies have become difficult to
actualize. A versatile commodity, oil is a multi-purpose raw ingredient found in many
products. Changes in oil prices are detrimental to the survival and success of many
organizations.

 Economic Trade Agreements. Economic trade agreements among nations have likewise
become a vital bargaining power in a country's economy. Bilateral and multilateral
economic treaties between and among economic global partners provide trade
priorities and privileges, allowing local products to reach other markets. Examples of
these products are clothes, furniture, bananas, handicrafts, dried mangoes, fashion
jewelry, and human resources. The World Trade Organization (WTO), Asian Free Trade
Organization (AFTA), North American Trade Agreement (NAFTA), and Asia-Pacific
Economic Cooperation (APEC) are examples of these economic alliances. The
implementation of zero or near-zero tariffs on all traded products is now effective.

 Emerging Markets. Closely interrelated to the political, social, and economic growth and
development of a country is the emergence of different markets. Developed,
developing, and underdeveloped countries are economic markets with unique • needs,
wants, demands, distinct traits, and peculiarities.

 Rise of China. One of the most potent economic markets in the world today is China. It
is seen both as a supplier and a big market. Constituting one-third of the world's
population, China is a market for other countries' products and services. As a supplier,
the country is capable of providing goods and services to the world market. Although
not apparent, the economic status of nations indirectly affects political alliances.

Technological Forces

We live in a digital world. Another important catalyst of competition is technology. In the


1980's, information technology began its journey toward radical communication and
technology growth. Significant changes happening in the world today have been the result of
rapid developments in information technology. These technological advances are observed in
the fields of communication, business, banking, education, medicine, security, and in all facets
of everyday living.

 Communication Technology. Communication technology saw the proliferation of


mobile phones, popularity of text messaging, convenience of sending fax messages,
usefulness of CCTV cameras for surveillance and simple monitoring, and benefits of
video conferencing, among others. The impact of these changes in the area of
communication technology cannot be overemphasized.
 Computer-integrated Business. Today, enterprise resource planning (ERP) integrates
business operations in marketing, accounting, production, operations, and
management. Computer-aided manufacturing makes production more efficient,
computer-aided design results in concise outputs while telecommunication technology
makes physical distances immaterial. Product innovation is easier to create, product
development is relatively shorter, less cumbersome but more challenging, and fewer
employees perform tasks due to technology. In addition, enterprise resource planning is
popularly applied in supply chain activities like purchasing, inventory management,
scheduling and dispatching deliveries, distribution logistics, documentation and
management of accounts receivables and payables, and preparation of income
statements and balance sheets. Thus, it can be said that ERP has revolutionized
operational activities, making processes more precise and efficient. In production,
processes are computer-aided, computer-integrated, and computer-manufactured,
thereby producing quality, more efficient, and cost-effective goods and services.

 E-banking. Banking transactions like deposits, withdrawals, and payments can be done
online nowadays. Intra-banking operations are more efficient while international
banking 'transactions are operated with accuracy and expediency. Confidentiality of
transactions can be largely maintained while anomalies can easily be tracked as long as
procedures for check and balance are in place.

 E-learning. One of the most recent developments in education is distance or online


learning. It is learning from home, the office, while on vacation, or from any place
outside the four walls of a classroom. Popular among busy people, e-learning has
become a convenient way of pursuing formal education: high school, vocational,
tertiary, graduate, and doctoral levels. Furthermore, e-learning within the classrooms
can be conducted since schools today have access to the Internet.

 Digital Medicine. Another surprising and most welcome development in the field of
medicine is the use of technology. Scientists conduct stem cell researches from leftover
human embryos with the hope of curing illnesses like diabetes, Parkinson's disease, and
spinal cord injuries. These days, computer-guided robots perform surgical procedures.
Using androids, surgical operations are more precise, cheaper, and less time-consuming.

 E-security. Security is another vital global issue. The use of information technology is
inevitable in manufacturing missiles and other forms of ammunitions, coding military
secrets, safeguarding fortified installations, monitoring enemies, securing soldiers, and
planning counterattacks. More particularly, robots can detonate bombs and operate
helicopters for reconnaissance missions. True, the age of digital living has arrived and
more changes are expected.

Environmental Forces

Environmental responsibility is the urgent call of the global neighborhood. Ecological


damage is happening everywhere. There seems to be an utter disregard or seeming
indifference about the environment. Environmentally, no country can claim complete isolation.
The safety and survival of one should be the concern of others. After all, nations share water
boundaries.

 Climate Change/Use of Biodegradable Materials. The effects of environmental


degradation, malpractices, neglect, and indifference are critical and serious. The use of
non-biodegradable materials emitting chlorofluorocarbons continuously causes the
widening and deepening of the hole in the ozone layer. As a result, global warming has
caused countries to experience extreme weather changes, that is, from heat strokes on
one end to extreme rainstorms on the other end like extreme global climate changes:
storm surges, tsunamis, below zero degree climate weathers, earthquakes, volcanic
eruptions, droughts, and forest fires.

 Environmental Waste Management. In many underdeveloped countries, noise, air, and


water pollution levels are high. Smog, fumes, and contaminants continue to cause
increasing incidents of diseases, more specifically those related to the lungs.
Mismanaged disposal of toxic wastes results in the occurrence of serious and infectious
illnesses; lack of clean water contributes to unhealthy living; unhygienic surroundings
are eyesores while lack of cleanliness produces grubby citizens who are health hazards
to others. Furthermore, the use of dynamites is destroying marine life, disturbing the
seabed, and killing aquatic plants and corals. Oil and gas spills contaminate bodies of
water and cause marine imbalance.

 Preservation of Rainforests and Marine Life. Rainforests are no exception. Continuous


depletion and denudation of forests explain why torrential rains are more destructive
and intense nowadays. They result in damage to properties and danger to human lives.
Irresponsible mining is slowly destroying and running down natural barriers that
otherwise provide safety of abode to people.
References:

Young, F. C. (2015). Strategic Management Made Simple

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