“The external business environment should not be feared

but be a source of stimulation for an organisation.”, a discussion.

Name: Mike Voss Student ID: 02868954

Course: E-Business Subject: Management

Program Specialist: Caroline O`Reilly

Student Signature:______________________ Date: 10th November 2002

“The external business environment should not be feared but be a source of stimulation
for an organisation.”

1. Introduction

I have chosen to discuss the above statement, because I believe that it deals with an aspect of modern
management that has been greatly stressed in the recent times, with environmental influences and even
turbulences occurring at a remarkable pace and their consequences for the business world being fairly obvious in
various ways. The largest of such recent events include the tragedy of September 11, the downfall of the mid-
nineties internet start-up businesses and the introduction of a unified currency in most of the EU member states.
To assess the issue, I will first lay out what the external business environment actually consists of, i.e.
how it is understood in general management theory today. Then I will weigh up arguments for and against the
statement, discussing, how the external environment influences managerial activity and whether it does pose a
threat that has to be feared or if it is indeed rather a source for stimulation, therefore to be considered an
opportunity and not an unmasterable difficulty. After this I shall give a conclusion presenting my own opinion
that has arisen from the above argumentation.

2. The External Business Environment in Management Theory

2.1 The Macro Environment

Management Theory differentiates the discussed External Environment into two major fields. On the
one hand, there are the influences of the outside world in general, gathered under the term of the Macro
Environment. This, as Robbins and Coulter call it, “General Environment”, as opposed to the later mentioned
“Specific Environment”, embraces general influences, that “may affect the organization but whose relevance is
not clear” entirely (1). Management Theory distinguishes the following five backgrounds of such influences (2):
International: Influences from organisations or events that take place on a global or at least cross
national level, most commonly used examples being the introduction of the EURO, the
actions of the World Trade Organisation and of course the European single market.
Political-legal: Similar yet distinguished from the later mentioned influences of specific regulators in
the task environment, these influences describe general legal organisational constrains.
A good example would be a trade embargo against a certain state as seen in the Iraq
crisis or the needed approval of a nation’s parliament to contract a supplier for the
production of a new military transport plane as recently seen in the NATO alliance.
Economic: Generally the welfare of the nation or other target groups within which an organisation
operates. Macroeconomic variables such as unemployment, interest rates, inflation and
overall economic performance come into consideration here. It can be observed in many
of the eastern parts of the now united Germany, were unemployment is high, thus
consumer power is low and companies are often reluctant to invest.
Technological: The ability to reach an organisation’s goals in a technologically feasible way, with the
recent development of the e-commerce markets being the best example, now allowing
business transactions on a global level with the click of a computer mouse.
Sociocultural: Summarizes the influences of ethical and moral forces that are at work in any society
today. Grave influence of such forces could be seen when people refused to buy
McDonalds products in the late 80s because they disapproved with the company’s
activities in Costa Rica, where the land was exploited for the growth of cattle to supply
the fast-food giant with the prime ingredient for its main product range. Another quite
interesting example is the still fast growing pornography industry in California, which
greatly profits from the changing moral of the last century; their merchandise being
unthinkable only fifty years ago, but now accepted as legitimate products by portions of
the society large enough to make it a very profitable market.
Overall, these environmental forces can be conceived as the “outside circle” (2) or the general setting for the
organisation’s field of operation.

2.2 The External Task Environment

To stay within the symbolic language that concluded the paragraph above, the External Task
Environment or “Specific Environment” (1), draws the circle around the organisation much tighter. Rather than
describing the general setting, it focuses on the actual forces that organisational management has to come up
against in its every day life. Many of these originate in the aforementioned Macro Environmental forces, but they
add much more detail to the picture of the business world and are “directly relevant to the achievement of an
organisation’s goals” (1). Also, they significantly change for each individual organisation rather than being valid
for every business operating in the earlier described General Environment.

2.2.1 General Approach to the External Task Environment

Regarding the External Task Environment, general management theory states that five main interest
groups need to be taken into consideration (2):
Suppliers or Providing the organisation with the necessary resources or a network to market a product.
Distributors: Best examples here include the Honda deal in the US, which tied one sole supplier for all
the mirrors of their cars to their US production. Supply can also mean the availability of
labour. An internet company looking for IT specialists may choose not to invest in a
country that does not have the appropriate number of university graduates to fill all vacant
places with qualified personnel.
Customers: A company aiming to generate revenue needs customers to buy its products in order to
archive its goal. Similarly, non profit organisations like governments or welfare groups
only have a purpose if they can please a set of people as their target group. Customer
satisfaction has a huge impact on the success of an organisation. A good example is the
expectation for a qualified technical hotline that can help customers with their problems or
a recommendable restaurant, which lives on the positive evaluation of its patrons.
Competitors: Deemed to be the leading influence in the external Task Environment by many researchers
of management theory, dealing with competitors includes most of the other factors. The
model of Michael Porter’s five forces is best used to explain the impact of competition on
an organisation’s activity, and I will elaborate on his concept in the following paragraph.
For now, the best examples for competitors’ influence can be taken from Coulter and
Robbins, who mention the opening of the American TV market to a broader range of
players other than the major networks like NBC, ABC and CBS in the early 80s of the last
century (3).
Regulators: Drawing their legitimacy from the political-legal forces in the Macro Environment, the
regulators consist of governmental institutions that impose rules and conventions upon an
organisation’s managerial activity. Best examples would be the regulation of meat import
from the British Isles due to BSE contamination or the general regulations for
employment to secure the rights of employees within a company.
Pressure Groups: Last but not least, “pressure groups” (3) like trade unions or environmental activist groups
can affect the course of managerial actions significantly. They are formed alliances of
people with the same interest that may support or oppose companies in various ways.
Greenpeace or other activist groups are good examples for this sector apart from usual
trade unions in workforce dependant organisations.

2.2.2. Michael Porter’s Five Forces

While most of the above mentioned embodiments of the External Task Environment are considered
individually influential in an organisation’s activity, most representatives of management theory follow Michael
Porter’s approach of the five forces. Porter emphasizes that strategic decisions are mostly influenced by dealing
with competitors (2). He outlined the five forces in this field to be the following:
Substitute Revenue may decrease due to replacement of a product by an alternative way of satisfying
Products the buyer’s needs (e.g. railway services have to live up against competition from trucks,
busses or other means of transportation) (3).
New Entrants The ease with which a possible new competitor can enter a market. For instance,
Microsoft will have a very low threat for a new competitor entering the market of personal
computer operating systems.
Buyers Buyers of a company’s products have great influence on its success as mentioned above.
However, they also have great influence on a competitor’s success, too, which is best seen
in the example given by Coulter and Robbins, where the US Postal Service received a
significant increase in customers, when United Parcel Service was unable to meet the
customer demand for logistics due to “pressure group” influences, i.e. an industrial action
by its employees at the time (4).
Suppliers Suppliers can influence the course of action by price policies, discounts for competitors,
or a contract that binds them to one single competitor, as in the case of the aforementioned
Honda decision to sign on a single supplier for mirrors in the US.
Industry Existing rivalry between players in the business section in which a company acts. A good
Competitors example is the continuous race for higher processor performance and product pricing
between the two mayor CPU producers, Intel and AMD.
This concludes the management theory’s understanding of the External Business Environment and now leaves
the statement up to discussion, whether the need to react to such influences poses a threat “to be feared” or “a
source for stimulation” as suggested in the title question of this article.

3. Fear or Stimulation?
“The difficulty of armoured contest lies in the challenge of turning far into near and disadvantage into
opportunity. […] This is why armoured contest is seen as useful, and this is why armoured contest is seen as
dangerous.” (5) This concept, formulated by Sun Tsu more than two thousand years ago, ages before the
development of modern management theory as we know it today, still holds as a major principle for
organisations coping with the environment described above.
One great danger in preparing for all the influences from the External Environment lies in the
implication of future uncertainty. As Weihrich and Koontz summarize it, “if the future could be forecast with
accuracy, planning would be relatively simple. Managers would […] compute the optimum method of reaching
their objective and proceed with a relatively high degree of certainty towards it.” (7) In reality, that will of course
never be the case, since a change in environmental influences may occur at any time and the embodiment of that
change may be unforeseeable, as with the events of September 11, making preparation for it difficult. Theory
calls events of a scale like September 11 environmental turbulence (2) and this concept is best used to illustrate,
why managers might fear the External Environment rather than take it as a source for stimulation. But even if
changes in these influences are foreseeable to a degree, providing for their eventual occurrence consumes a
respectable amount of resources that could be allocated elsewhere in the organisation’s operations. A good
example for this is the necessity for the creation of reserves in financial accounting, or the reinsurance policy of
big insurance companies, that provide for the unlikely but not impossible case of giant charges due to events like
September 11. Certainly premiums for these reinsurance policies are high and could be used to fuel the
company’s profit making by investing in the capital market rather than having to provide for such uncertainties.
To quote Peter Drucker’s “Managing in Turbulent Times” introduction, “the first task of management is to make
sure of the institution’s capacity for survival, […] to adapt to sudden change, and to avail itself of new
opportunities” (6) which implies that resources are consumed by allocation to security measures first, before
other strategic actions can be taken.
But even without consideration of the constant change in many of the environmental forces, their sheer
complexity in itself poses a challenge to any managerial activity, as it makes planning ever more complex,
having to take many things into consideration before going ahead with a strategy. Thus even a stable, less
dynamic Environment (2) may hold a great challenge, since a variety of influences always means a variety of
pitfalls and dangers that eventually decide over success or disaster in a manager’s decision. A good example here
is the already mentioned competition situation for the railroad companies in the United States in the middle of
the last century, where managers only considered competition by other railroad companies, when in reality, they
should have considered competition from all the other transport businesses, since these provided a substitute for
their good. (3)
Overall, these arguments may imply that the External Environment is to a certain degree “to be feared”
rather than to be seen as “a source of stimulation”. However, one cannot ignore the presence a strong argument
supporting the statement in the article title, because, to come back to Sun Tsu’s evaluation of armoured contest,
the environmental circumstances can prove very useful, as long as you are aware of the threats and manage to
“turn far into near” and more generally “disadvantage into opportunity”.
Certainly the first discussed argument, fielding future uncertainty leading to fearing the environment
rather than taking it as stimulation, holds valid on a theoretical level. However, future uncertainty and its
resulting dynamics in the External Environment is in existence everywhere, no matter how much a manager may
wish for a sterile, easily forecasted environment to operate his business in. Since it is a given fact, managers that
are aware of it may turn its disadvantages into opportunities by simply coming up against it with a better, more
efficient contingency plan than their competitors in the market. Thus, in a rather Darwinistic approach, they may
come out of a crisis that has affected the market sector due to turbulence or other changes in environmental
influences as a beaten but surviving winner, eventually even strong enough to claim portions of the market that
were formerly owned by a competitor. A very good example for such successful planning was the positioning of
companies in the German major contractor market, with players like Holzmann and Hoch-Tief rivalling in an
ever tighter growing market area of construction industry. When Holzmann finally could no longer cope with its
resulting financial difficulties, Hoch-Tief, who had long been less than even rivals with them, were well
positioned to take its market shares that they had so long competed for, simply because they apparently had a
better way of surviving the depression that had diminished their profitable field of activity in the wake of a less
and less favourable growing economical Macro Environment.
The same argument holds in the field of environmental complexity, since an organisation that has an
efficient Information Management System in operation, may easily beat its competitors by quickly assessing any
issues that may arise in any area of business, thus still aiming for the “optimum method of reaching their
objective” (7) even though they operate in a complex and not totally foreseeable surrounding. A well informed
manager is provided with a variety of possible actions and reactions to his External Environment, ranging from
changes in strategic positioning like the change of IBM’s product focus from personal computers to mainframe
and minicomputers at the end of the 1980s and early 1990s, to mergers, takeovers, acquisitions and alliances as
Vodafone showed with companies in all major telecommunication markets in Europe in the recent years, even up
to not always legal direct influence in outside forces as lobbying or party financing in the political sector as it is
rather popular in the American system, where organisations like the National Rifle Association or representatives
of the energy industry have created an atmosphere of political support for their cause through various action to
influence political forces.

4. Conclusion

Weighing up the pros and cons of whether “The external business environment should not be feared but
be a source of stimulation for an organisation”, I generally agree with the overall statement. However I would
amend it to “not only be feared”, because I do believe, that fear as in terms of awareness of the External
Environment’s dangers, is a managerial skill of utmost importance for the survival in the business world. A
manager is constantly kept at edge and thereby forced to keep his or her organisation flexible to react to the
forces that influence its area of activity and thus is indeed constantly provided with “stimulation” to keep him or
her vigilant to the surroundings. New opportunities arise everywhere like in the 1990s internet boom, but as
shown by the very few successfully surviving players from that time, like e-bay or Amazon, not only the avail of
new opportunities but also the avoidance of ever present threats make a successfully surviving and eventually
prospering business that is here to stay.
References

Unless specifically stated otherwise, the author draws his general knowledge from the 2002 Daytime
Management Lecture MG111 by Caroline O´Reilly, Tipperary Institute, Thurles

(1) Kolter, Philip (1997), Marketing Management: Analysis, Planning, Implementation, and Control.
Prentice Hall
(2) Lecture Notes Management MG111 by Caroline O`Reilly, Lectures 3 and 4, based on Griffin,
R.W. (1999), Management 6th edition, Houghton Mifflin Company, USA
(3) Robbins, S.P.; Coulter, M. (1999), Management, 6th edition, Prentice Hall International Ltd., UK
pp. 96-97
(4) Robbins, S.P.; Coulter, M. (1999), Management, 6th edition, Prentice Hall International Ltd., UK
p. 79
(5) Sun Tsu, (appr. 500 b.c.), The Art of War, translated from the German book (2001) Wahrhaft siegt,
wer nicht kämpft, 2nd edition, Piper Verlag GmbH, Germany, pp. 147-148
(6) Drucker, P.F.(1994), Managing in Turbulent Times, new edition, Butterwourth Heinemann Ltd.,
UK, p. 1
(7) Weihrich, H.; Koontz, H. (1994), Management – A Global Perspective, 10th edition, McGraw-Hill
Inc., USA, p. 185