Influence of External Environment on Organization
Influence of External Environment on Organization
Organization is regarded as a human activity which is concerned with the production and distribution of goods and service. It is a social facility by which societies organize economic efforts. Most specifically, an organization is the sum total of the organized efforts by which the people engaged in commerce and industry, provide the goods and services needed to maintain or improve the standard of living and quality of life to which an individual can aspire. In management, the word ‘environment’ does not necessarily mean physical surroundings, but it is used to describe all those influences which bear upon the individual organization. Organizational environment is used to mean, anything, which surrounds the organization. It affects the decisions, strategies, processes, and performance of the organization. The environment consists of factors which are beyond the control of organization.
Organizational environments under which they operate are both internal to the organization as well as external to the organization. Understanding of the external environment is very important for the successful functioning of the organization. External environmental factors affect almost every aspect of the organizational functioning, whether it is the location of the market, product price, or product distribution etc.
The word ‘environment’’ is derived from the French word ‘Environ’ which means ‘surrounding’. Hence, the external environment is the environment which is outside the organization and needs to be analyzed to determine the opportunities and threats which are faced by the organization. The external environment of the organization can be measured by several dimensions such as political environment, economic environment, social environment, and technological environment. The external environment has an impact on the performance of the organization.
Organizations are normally surrounded with an environment which has several opportunities and threats. The organizations have to make sure about their strengths and to know about their weaknesses in the environment in which they are living in, in-order to adapt the environment for their effective functioning.
Since organizations make demand on the society and the society makes demands on the organization, organizational managements are required to interact with and respond to environmental factors which are either internal or external to their organizations. The sum of these inter-relationships within the organizations and between the organizations and the society is what is known as the management of the organizational environment.
It is necessary that the organization has the capability of adapting the changes which takes place in its external environment, i.e., responding to direct changes in the external environment factors while maintaining a stable position. This adaption largely determines the level of competitiveness of the organization.
In the environment, there are several forces which changes with time. These changes have impact on the organization. The organization is required to react and respond to these changes. Sometimes the organization avoids or reflects the changes instead of reacting and adapting itself with the changes. This approach of the organization leads to the failure in the organizational growth and causes step by step decrease in the development of the organization.
Regardless of the industry in which organizations compete, the external environment affects organizations, as they seek to ensure strategic competitiveness. The external environment of the organizations is an integrated, dynamically developing characteristic, which includes a complex of social, technological, economic, political and legal factors. These factors are beyond the control of the organization and impose their limitations on the activities of the organization. The survival and success of the organization depends on the skillful interaction of the organizational management with the external environment and timely responses to the changes in this environment, analyzing and accounting for its impact on the organization and its functioning in general.
For the organization to react and to respond to the several forces existing in the environment, the organization needs information and resources. The organization responds to the changes which are happening in the external environment, through the adaptation of the changes and by making changes in organizational overall structure and by redesigning the organizational functioning. Changes in the structure or changing the organizational products and services are the parts of the adaptation by the organization to the external environment.
The wider concept of the environment constitutes the totality of the surroundings of the organization. The term external environment refers to an aggregate environment which has a direct or indirect impact on the performance of the organization. It can also be defined as a set of external factors, such as economic, social, political and legal factors, demographic factors and technical factors, which cannot be controlled and which affect the efficiency of the organization.
Harrison defines environment as ‘all the conditions circumstances, and influences surrounding and affecting the development of the total organization or any of its internal systems’. He argued that environment contains forces of complexity which are dynamic to varying degrees at differences, and under different circumstances.
Pannerseelvan and Ramakrishnan have defined environment as ‘the universe of a biotic and other physical elements as organized into dynamic system. These systems are ecological systems or ecosystems which represent the integration of living (biotic) and non-living (abiotic) elements in the environment’.
Atsegbua has described environment as ‘the system of abiotic, biotic and interact and simultaneous to which he adapts and transforms and uses in order to satisfy his needs’.
Blurtit regards ‘business environment as those conditions and forces which are eternal to the business and are beyond the individual business unit, but they all operate within it’.
Fermando regards business environment as ‘external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a business enterprise. These include customers, competitors, suppliers, government and the social, political, legal and technological factors etc.’.
Oyebanji has defined business environment as ‘those factors that can influence the individual’s business organization’. He stressed further by saying that every organization is to take into consideration the environmental constraints, material and human resources in their respective business in spite of their differences in status and that the effect of the environment caries from one situation to another.
From the above definition, it can be seen that the term external organizational environment involves external forces, factors, and institutions which are operating beyond the control of the organization, and which affect the functioning of the organization. Changes in the external environment are unpredictable, vary from place to place, region to region, and from country to country.
Organization needs a close interaction with its environment since this interaction helps the development and growth of the organization as well as the efficient use of organizational resources. The external environment of the organization is complex and dynamic by nature and has a long-lasting impact on the survival as well as in the development of the organization. A proper understanding of the social, political, economic, legal, demographic and technological factors of the environment helps the organization in identifying opportunities and threats, in focussing on growth and continuous learning, achieving competitiveness, and identifying the strengths and weaknesses.
The external environment of the organization influences the strategy of the organization. The nature of the elements constituting the external environment frequently confronts the organizational management with the need to make decisions under a situation which has considerable uncertainty. The dynamitic nature of variables, which have seldom well identified controls over the outcomes of events initiated within the organization, are also complex. However, the frequent lack of control does not mean that the management is to disregard the environment, but rather it is necessary to undertake continuous surveillance of the environment so that the management can respond to the adverse reactions or outside changes.
The external environment of the organization includes factors which are beyond the immediate control of management. These factors create challenges and opportunities which the management is required to consider when making strategic choices. Such factors include the activities of the customers, competitors, and suppliers, the manpower market, legal, regulatory, competitive and economic conditions, as well as the supply of technological and other types of knowledge which has value for innovation.
The external environment differs from the internal environment of the organization which is apparently under the control of the management and refers to the organizational operational model, production and innovation capabilities, as well as financial and human resources.
The macro environment in which all organizations operate broadly consist of the economic environment, the political and legal environment, the socio-cultural aspects and the environment related issues like pollution, and sustainability etc. The technology and its progress are the key driver behind the major changes witnessed in the external environment making it increasingly complex. These factors frequently overlap and the developments in one area can influence developments in other areas.
External factors, also known as exogenous factors comprise those factors in the external environment which can accelerate or decelerate the performance of the organization. These factors constitute everything beyond organizational boundary which is capable of affecting the performance of the organization either directly or indirectly. These factors are sometimes called as environmental hostility. Example of external factors are industrial growth, customer demands, heterogeneity, and external technological development. These factors influence corporate entrepreneurship behaviours and activities of the organization.
The success of an organization depends on the ability to adapt to the environment in which it operates. For example, when the government changes its policies, the organization is to adopt the new policies. Similarly, changes in technology can make existing products outdated. These cases represent external factors which cannot be controlled by the organization. Hence, if the organization wants to continue to function effectively, it is required to adapt to the changes taking place in its external environment.
Fig 1 gives an overview of the main external elements which can influence the organizational performance. There are five main elements namely (i) spatial and locational factors, (ii) markets, (iii) knowledge flows and networks, (iv) public policies, and (v) society and the natural environment.
Fig 1 Main elements of the external environment of an organization
Spatial and locational factors define the jurisdictional location and its proximity to product and labour markets of the organization. These factors can influence costs and awareness of customer demand. When detailed data on policy, taxation, public infrastructure, society and other factors which vary by location, are not available, the location of the organization at the regional or national level can act as a proxy for these factors.
Markets are leading contextual factors which are also shaped by the organizational decisions. Relevant information for data collection includes the characteristics of suppliers which provide inputs of goods and services to the organization, the structure of demand in the present and potential markets of the organization, the markets for finance and labour, as well as data on the extent of competition in product markets and standards. Information on intermediaries and platforms is of growing importance because of the reorganization of several markets around online platforms.
Public policies can influence organizational activities in direct and indirect ways. The regulatory and enforcement framework influences how organizations can appropriate the outcomes of their efforts and the multiple relationships and transactions which the organization engage in, while the tax system affects the cost of organizational activities. Governments can also use the tax system and other policies to target support to the organizations. Other aspects of the industry sector which can influence the organization include the delivery of infrastructure services and the management of macro-economic policy, which the society and the natural environment can affect the ability of the organization to launch and successfully exploit innovations.
Society and the natural environment can directly and indirectly affect organizational activities. Societal aspects can influence the public acceptance of the organization as well as organizational policies on corporate social responsibility. The impact of the organizational activities and products on the natural environment can also drive organizational performance. Organizations also engage in activities in response to predicted changes in the natural environment, as in the case of adaptation to climate change. Disaster events can also happen in the natural environment of the organization for which the organization is to prepare itself for facing it with least damage.
The different elements of the external environment show a great deal of overlap and interaction with each other. For example, public policy can influence the evolution of an organizational environment through markets by regulating monopolies or by using market mechanisms to mitigate the negative environmental effects of operational activities. Markets, government, and social institutions and norms can underpin the availability of useful knowledge which the organizations draw upon for innovation and for shaping of the knowledge flows and networks.
External environment is the sum total of conditions which surrounds the organization at a given point of time and space. It is comprised of the interacting systems of physical, biological, and cultural elements which are interlinked both individually and collectively. External environment is also being considered as the sum total of conditions in which the organization is to survive for maintaining its operations. It influences both the growth and the development of the organization. External environment refers to anything which immediately surrounds the organization and which exerts a direct influence on it. It consists of the interacting systems of physical and cultural elements which are interlinked both collectively.
Organizational environment has several features which include (i) it is the sum total of all the factors external to the organization (ii) it greatly influences the functioning of the organization, (iii) It covers several factors and forces such as customers, competitors, suppliers, and government as well as the social, cultural, political, technological and legal aspects, (iv) it is dynamic in nature, which means, it keeps on changing, (v) The changes in environment are unpredictable i.e., it is very difficult to predict the exact nature of future happenings, and (vi) it differs as per the geographical location.
The environment can be broadly categorized into the internal environment and the external environment with the former comprising variables or factors within the control and manipulation of the organizational management for achieving the set objective while the latter encompasses factors which are outside the control and manipulation of the organizational management. Hence, the organizational management is required to develop a plan which helps the organization to cope with the different environmental forces.
The nature of the environment can be classified as dynamic, stable, and unstable which frequently helps the organizational management in the selection of appropriate strategies. For the organizational management to cope with the dynamic and rapidly changing environment, there is a need to develop and implement appropriate strategies which are going to safeguard the operations of the organization and which are going to yield the desired results. Further, the organizational management’s perception of the nature of the organizational environment is a function of its size and industry in which it is functioning.
In management, the word ‘environment’ does not necessarily mean physical surroundings, but is used to describe all those influences which bear upon the organization. The environment is used to mean anything, which surrounds the organization. It affects the decisions, strategies, processes, and performance of the organization. The environment is consisting of factors which are beyond the control of the organizational management. It provides opportunities or poses threats to the organization.
The survival and the success of the organizations depend on the appropriate adoptions to a complex and ever-changing external environment. It is pertinent for the management of the organization to identify opportunities and threats in the external environment. For effective functioning is their external environment, organizations are to focus on the potential and existing strengths and weaknesses. They are to respond swiftly, in order to know where they can have the competitive advantage over their rivals. Hence, organizations are required to continuously look and observe their external environment.
The external environment is the organizational aggregate of factors, exogenous to the organization which has potential to impact the performance of the organization. All the organizations are open systems. The external environment provides organizations with inputs which they transform to outputs through internal processes and then the outputs are given back to the environment. Organizations cannot single handedly have full control over occurrences happening in their external environment. The external environment is source of constraints, contingencies, problems as well as opportunities which affect the terms on which organizations manage its functions.
Regardless of the industry in which organizations compete, the external environment influences organizations as they seek strategic competitiveness and the earning above average returns. An overall assessment of the conditions which affect the organizations today indicates that for the majority of the organizations, their external environment is filled with uncertainty. For successfully dealing with this uncertainty and achieving strategic competitiveness in order to thrive, organizations are to be aware of and fully understand the different indicators of the external environment. It is this understanding which helps the organizations can take actions such as building capabilities and core competences which in turn help the organizations in buffering themselves from any negative environmental effects while pursuing opportunities.
Concerns on what is to be observed and measured in the external environment remains unresolved, since it is impossible to examine everything which is occurring. Some of the elements can be more relevant to some organizations than others. It is frequently suggested that the environmental construct is to be treated as consisting of two broad aspects, first the factors (internal and external) and second the dimensions. Notably, the latter forms the basis for assessing the former. The external environment provides three dimensions of manifestation which are complexity, munificence and dynamism.
An environment is complex if it provides excessively diverse and or several dimensional units of information, which needs substantial integration of, thought and can be described as multi-dimensional. Environmental complexities are viewed as the interaction between environmental risks, dependency, and inter organizational relationships. Environmental complexity is considered an important, if not most the most important variable in the environment surrounding the organization.
On the other hand, environmental generosity is the scarcity or abundance of critical resources by one or more organizations operating within an environment. Organizations seek generous environments and attempt to improve the generosity of their present environments.
Dynamism refers to the ever-changing nature of the external environment. The ever-changing nature of the external environment can transform the purpose of the organization and the environment in which it functions. Organizations can set targets, negotiate and agree on performance indicators for execution in order to achieve superior performance. However, occurrences in the external environment can manifest themselves in a manner which accelerates or decelerates the relationship between strategy implementation and organizational performance.
Institutional theory postulate that the organizational environment in which organizations operates exerts pressure on them. The pressures from the environment provoke different responses as organizations seek legitimacy in order to survive and prosper in their environment. When innovative structures are developed and legitimized through the process of institutionalization, they serve to improve on operational efficiency and as such organizational performance. Institutional theory asserts that market pressures and institutionalized managerial practices are considered the most important factors which influence organizational performance.
Organizational managers as institutional actors are the causal agents which have the ability to interpret strategic stimulus and craft as well as implement strategic responses. Since the period immediately after disenchantment of strategy planning in the late 1970s, the role of the external environment can no longer be ignored in strategic management. Organizations can no longer predict with precision what they are going to do five years down the line. Occurrences within this environment can have a bearing on the organizational performance. Environmental conditions such as uncertainty, dynamism, hostility, the number of relevant components in the environment and the interpersonal relationships between these components, all increase the perceived complexity in managing organizations.
Organizations face turbulent and rapid changing environments which are translated into complex, multifaceted, and interlinked streams of initiatives. This turbulence has effect on work, organizational designs, and resource allocation hence leading to variations in performance. Delays in availability of resources, political interference, and variations on the economic situations have been considered as attributes to poor organizational performance even with a perfectly formulated strategy.
Organization theory proponents emphasize that organizations are required to adapt to their environment if they have to survive. As per this theory, organizational outcomes are partially predicted by the environmental manifestations. Changes in the external environment can be favourable or unfavourable to organizational outcomes. Factors in the external environment influence organizational processes differently. Superior organization performance is realized when the responsiveness of the strategy of the organization matches the turbulence in the environment. The external environment remains a crucial aspect in the strategic management. Hence, it can be postulated that the external environment has an influence on the organizational performance.
The need for studying the environment becomes important considering the fact that the organizations do not operate in vacuum. The effective management in a complex and dynamic society needs the assessment of strengths and weaknesses of the organization and the opportunities and threats posed by the challenges of the external environment. For survival and growth, organizations are required to adapt to the changes taking place in the organizational environment. It is necessary that the organization management examines the impact of the environmental challenges on the performance of the organization on a continuous basis.
The organization can continue to exist only if it has an efficient technology of production and has an effective management. In addition, the activity of the organization in its external competitive environment is to be concentrated in the area where it can preserve or gain (multiply) the competitive advantage. In the process of development of different alternatives, the organization is to consider not only the present and the future capabilities and threats, but also the internal potential, strengths and weaknesses, as well as the competitive advantages which provide an opportunity to become a leading organization in the industry.
The process of analyzing the external environment is intended to identify two variables, namely, the capabilities and threat, which the organization is to monitor not only in the short term but also on a continuous basis. Organizational management is required to acknowledge that the external environment can include changes in the international economy, changes in technology, changes in the national economy, national culture and traditions, industry / sector characteristics, legislation and regulation of activities, changes in trade union activities, and the competitors. All of these determine the essential characteristics of managing the external environment (its aspects), which are necessary for the development of an appropriate organizational strategy.
The study of the degree of their influence of the main elements of the external environment on the organizations promotes the growth of the organizational competitiveness, and allows identifying potential capabilities and threats for the organizational activities necessary for the development of the concept and strategy for the organization for its successful functioning.
Analysis of the external environment allows the organizational management to control the external factors in relation to the organization. It helps to anticipate possible threats and to identify potential capabilities of the organization. It also allows timely development of situational plans in case of occurrence of unforeseen situations, as well as development of measures to turn potential threats into potential capabilities.
Purpose of environmental analysis include (i) to characterize the environment which can influence the organization, (ii) to identify threats and be prepared to handle them appropriately, (iii) to identify opportunities and be prepared to benefit from them in a timely manner, (iii) to identify competitive strengths and weaknesses, (iv) to recognize competition in the market and how to compete more effectively, and (v) to identify stakeholders and what they need from the organization. Regular environmental analysis is necessary if it is to have any relevance to the organization. The tools for environment analysis are (i) PEST (political, economical, social, ant technological) analysis, (ii) Porter’s five forces analysis, (ii) industry life cycle analysis, (iv) competitors’ analysis, (v) Porter’s diamond, and (vi) SWOT (strengths, weaknesses, opportunities, and threats) analysis.
The external environment of the organization consists of four dimensions namely (i) political, (ii) economical, (iii) social, and (iv) technological. These factors are frequently known as PEST factors. Examples of political environment are laws and statutory regulations, tax policies, and political stability etc. Examples of economic environment are growth of economy, interest rate, inflation, and market competition etc. Examples of social environment are local society, local facilities, mobility, social work, and availability of skilled manpower etc. Examples of technological environment are status of technology in the industry, technological development, technology transfer, research and development (R&D) in the industry, and changes in information technology / internet etc. PEST analysis assesses the general environment, specifically considers market conditions, i.e., growing or declining, and can also be used to identify opportunities and threats.
Hence, taking into account external factors and their analysis by the management directly affects the performance of the organization. Organizations, according to Morrison, are so influenced by external macro-environments that they are unable to plan for the political, economic, social, technological, environmental, and legal challenges they face. External factors are not controllable but taking measures in advance and identifying them in time has a positive effect on the organizational performance. The variations of PEST factors are is the PESTEL / PESTEC factors. This group of external factors which affect the management of the organization are political, economic, social, technological, environmental and law / competitive factors. Each factor has its importance and impact as an external factor in organization management.
The acronym PESTEC is used to represent different types of external forces. These are (i) political, e.g., stability, new laws, regulations and tax policies etc., (ii) economic, e.g., economy growth, interest rates, unemployment, and inflation etc., (iii) sociological, e.g., mobility, local society, local facilities, social work, and surge in the buying power of consumers etc., (iv) technology, e.g., technology transfer, technology status, automation, and R&D etc., (v) environmental, e.g., three Rs (reduce, reuse and recycle), pollution, local weather, and natural calamities etc., and (vi) competitive, e.g., market forces, product quality, competitors, and prices etc. Fig 2 shows PESTEC external forces.
Fig 2 PESTEC external forces
Porter’s five forces analysis model focuses on conditions within a specific industry. The five forces decide whether or not an organization in its industry is profitable. Normally, the greater the forces, the lower the prospective profit potential. Success lies in minimizing these forces so as to increase the organizational profit potential.
Fig 3 Porter’s five forces model
As per the industry life cycle analysis, there are several stages in the life cycle analysis model for a product. This analysis allows the implementation of different strategies at different stages for gaining maximum benefit. This life cycle analysis can be applied to both the products and the industry. The life cycle comprises four stages namely (i) introduction, (ii) growth, (ii) maturity, and (iv) decline. Fig 4 shows the four life cycle stages and their marketing implications.
Fig 4 The four life cycle stages and their marketing implications
Competitor analysis seeks to understand competition. It aims to define the position of the organization relative to its competitors regarding competitive advantage, current strategies, prospective strategies, and competitor behaviour. There are three aspects of competitors analysis as described below.
The first aspect is the identification of the competitors. There are four types of competitors namely (i) brand competitors which sell similar products in the sane market segment, (ii) industry competitors, which sell similar products to different markets, (iii) form competitors which sell different products which cater to the same need, and (iv) generic competitors which sell different products but aim for the same revenue.
The second aspect is the analysis of the competitors. The competitor analysis is done in order to predict the strategy of the competitors, as well as to help foresee the response of the competitors to the strategic changes of the organization. Competitor analysis is done for determining (i) the objectives of the competitor, (ii) the competitive strategy of the competitor, (iii) the competency of the competitor, and (iv) the assumptions held by the competitor.
The third aspect is the competition response profiles. It determines how a competitor responds to the competition. It is classified as (i) laid back i.e., no response, (ii) tiger i.e., aggressive response, (iii) selective i.e., responds in certain cases, and (iv) stochastic i.e., unpredictable.
Porter identified four factors in his diamond model. These factors are (i) factor conditions, (ii) demand conditions, (iii) strategy, structure, and rivalry, and (iv) related and supporting industry. He also identified two other influential factors namely (i) the role of government, and (ii) the role of chance events.
Porter’s diamond model (Fig 5) identifies the reason why the organizations excel in competition over other organizations. It also identifies why specific industries cluster in specific areas in a country. It basically determines the competitive advantage of the organizations. It identifies the factors which cause some organizations to succeed and not the other organizations. It can help assess factor conditions in a foreign country for expansion. Governments can use it to attract investment in specific industries.
Fig 5 Porter’s diamond model
Another analysis which is very helpful for the organization to adapt to the external environment is SWOT analysis (Fig 6). It is also known as TOWS matrix. SWOT analysis is focusing on the internal and external environment normally, and it shows the position of the organization in the market and environment. SWOT is the analysis which is used by the organizations to know the position of the organization in the market, and it helps to know how to adapt with the changes and the updates in the organization. The components of strength and weaknesses are internal to the organization while the components of opportunities and threats are external to the organization. As the organizational management focuses on the external factors which influence the organization, it focuses on opportunities and threats which are there in the organizational environment. The threats are like the competitors, the new rules and regulations by the government, or the economic decline, and the opportunities are like the new market area, no strong competitions, or low expectations from the customers.
Fig 6 SWOT analysis and TOWS matrix
The survival and success of any organization depends on its economic environment. The main factors affecting the economic environment are economic politics, economic situation, and factors such as energy prices, transport costs, the price of telecommunications services, quality standards, and the influence of the banking sector etc. The economic situation of the country refers to a set of economic factors which have a major impact on the operations of the organization. This includes the gross domestic product, the market of goods and services, foreign exchange reserves, the growth of foreign trade, the availability of capital, the power of capital markets etc.
The economic situation of the country has an impact on patterns of consumer spending. An increase in interest rates and / or high levels of unemployment reduces the consumption of non-essential goods and services. As an example, if people experience financial difficulty, they spend less money on sports and recreation, vacations, new cars and luxury goods.
Social environment refers to people’s attitude to work and wealth, role of family, marriage, religion and education. The social environment of organizations includes social factors like customs, tradition, values, beliefs, poverty, literacy, and life expectancy rate etc. The social structure and the values which a society cherishes has a considerable impact on the functioning of the organization.
The socio-cultural environment is the entire range of behaviours and relationship issues in which individuals are involved in their highly confidential lives which include age, gender, race or ethnicity, class, values and attitudes, lifestyles, and relationships. Socio-cultural environment can either impede or facilitate the achievement of the goals and objectives of the organization.
The political environment includes the political system, government policy, the attitude towards the industrial community, and trade unions etc. All these aspects have an impact on the design of corporates strategy of the organizations. The stability of the government also sends a signal of strength and confidence to potential investors. Political factors affecting the organizations are important. All organizations are to comply with the law and regulations, and the organizational managements need to recognize how upcoming laws are going to affect their organizations.
Technological environment includes methods, techniques and approaches adopted for the production of products and services and their distribution. Technology is a key factor in economic development. Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. Technology changes fast and to keep pace with it. Organizations are to be ever alert to adopt changed technology in their industry. Because of the advancement of international communication, the growing economic inter-dependence of countries, as well as serious shortages of important natural resources, transfer of technology has become a major pre-occupation of developed and less developed countries.
Enormous changes in the technological environment have occurred over the past 30 years to 40 years in several areas. It is very important for the organizations to keep up to date with these changes, not only since it enables innovative new products, but also provides the organization a competitive advantage.
As the technology continues to advance, organization can take advantage of advanced technology for improving its competitiveness. With the adaption of advanced technology, the organizational productivity and products quality improves. This helps in the customer acceptance of the products, and improving the organizational profitability.
The legal environment is derived from the political situation in the country and has three dimensions namely (i) the laws in the country, (ii) the laws of the foreign market, and (iii) international laws. The basis of all commercial activity is a contract. The purpose of the contract is to determine rights and obligations of the parties. In this way, the possibility of conflicts between parties is reduced. In the context of international marketing, which brings a number of risks and complexity, the contracts assume a key role in, for example, booking forwarding organizations, shipping lines, and airlines etc.
In a democratic country, government can change after the elections. The new government can have different preferences and different policies. Organizational management has to closely prepare for potential changes because of the political decisions. It has to be prepared for modifying the organizational processes to comply with new legislation and regulations without affecting the functioning of the organization.
There are several demographic factors affecting organizations such as income, age structure, geographical area, changes in the size and structure of population etc. These factors can be presented as a range of properties which are used to determine consumer preferences. Several organizations identify their key customers through the analysis of these traits. Then they target consumers with similar characteristics through advertising and promotions. Targeted consumers with similar demographic characteristics help the organization increase its sales and profit.
Organizations with successful products and services evaluate the demographics of their target market. They also perform tests to measure how well they serve their customers. This helps them understand if the needs of the target market are being met. It also helps for taking decisions so that better ways are developed for serving the loyal customers and adding new customers. Demographics also helps the management in product design and in advertising campaigns to be carried out.