THE ENVIRONMENT UNDER WHICH MANAGEMENT IS PRACTISED Definition of Environment

Organizations do not operate in vacuums rather they operate within the setting of a larger system which constitutes the environment

Environment generally refers to the surroundings, circumstances and influences on individuals or organizations. The effects of the environment can either be positive (i.e.

beneficial) or negative (i.e. cost/constraints)

Although constitutionally the power of managing organizations rests with management, which should use its ability to make decisions, in real life this is not always possible because the environment exerts pressure on management. These pressures are what are referred to as environmental constraints.

The environment has also been defined as the aggregate of socio-cultural, economic, and physical conditions that influence the life of an individual, organization or community. No enterprise of any kind can operate in the absence of environmental constraints, or restrictions imposed by the organizational surroundings. While managers exercise power their authority is always limited by the environment, of necessity then, all enterprises must adjust to the

environments in which they exist. Every organization has two types of environments: Internal (task) and External (general).

The External Environment

The external environment of an organization, also sometimes called its general environment consists of those factors that are outside the control of the manager (external to it) but which nevertheless affect managerial decision-making.

The external forces generally affect all organization within that society so they are not specific to any one organization.

Social and Cultural environment

The business operates within a social framework. Four aspects of this are relevant.

2.2 Power: - who has it how effective is it and how is it used.

2.3 Leadership:- who are the leaders and what are their weaknesses and strength.

2.4 Culture:- the value s and traditions within which the business must operate. One

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2.5 Risk:- attitudes towards risks and risk taking can be risk averse or seekers.

2.6 The organisation is influenced by changes in the nature, habits and attitudes of society: -

2.7 Changing values and lifestyles eg. flexible working hours, internet access and other IT devices that allow people to shop on line

2.8 Changing beliefs

2.9 Changing patterns of work and leisure 2.10 Demographic changes.

2.11 Changing mix in the ethnic and religious background of the population.

The social environment also covers the study of population trends. The manager will make use of such trend to determine the size, type and location of the market place for products or services.

 Size: Expected growth or decline on the national and international population affects the markets size.

 Type: Changes in the age distribution affects the product or services to be offered.

 Location: The expected drift of population into different parts of the country affects the channels of distribution.

 Demographic changes can have negative impact on demand. Falling birth rates could indicate problems ahead for producers and sellers of baby products later.

 Emigrating population can reduce demand on a local basis.

 Culturally changes in tastes and fashion can have a damaging effect on organisations that fail to anticipate the changes eg. clothing.

Legal environment

It is concerned with how an organisation does business and covers:-

 Law of contract i.e. validity of contract.

 Sale of goods Act – selling practices

 Health and safety legislation for example in UK there is an Act that governs health and safety at the workplace. It covers the working condition and the preventive measures that an employer should put in place.

 Employment Act: How an organisation treats its employees.

 Legislation on competitive behaviour – Law of Tort.

 Law of Tort: Negligence, Auditor‗s and management liability.

 Environmental legislation: Pollution control such as waste management.

 Company‗s Act in Kenya Cap 486

 Tax Act Cap 470

Changes in the law can affect the organisation in many ways for example a tightening of health and safety legislation may increase costs. Premises failing to meet standards may be closed down.

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 A particularly damaging change is the complete ban on a company‗s product and this could be worse if the company had not diversified enough its product portfolio. This is what BAT (K) Ltd is facing as many international organisation press on for a total ban on marketing of tobacco products.

The economic environment

The current state of the economy can affect how a company performs. The rate of growth in the economy is a measure of the overall change in demand for goods and services, Other than economic influences include:-

 Taxation levels

 Inflation rate

 Balance of trade and exchange rates

 Level of unemployment interest rates and availability of credit

 Government subsidiesOne should also look at international economic issues:-

 The extent of protectionist measures.

 Comparative rates of growth, inflation, wages and taxation

 Freedom of capital movement

 Economic agreement in various trading blocs such as the EU, COMESA.

 Relative exchange rates.

 A downturn in the economy can lead to corporate failures across a number of sectors.

The worst hit are suppliers of goods with high income elasticity demand eg. house builders like Housing Finance.

Deflationary government fiscal policy (low government spending, high taxation and a planned budget surplus) and central bank monetary policy

High interest rates, restrictions on money supply expansion and revaluation of currency can adversely affect a business. This is because they influence demand for goods both domestically and internationally, cost of capital and the level of profitability which in turn affects dividends and retained earnings level.

Political environment

The origin must react to the attitude of the government. The organisation must react to the new attitude of the government of the day. The government is the nation‗s largest consumer, employer and investor and any changes in the spending priorities will have a significant impact on a business.

Political influence will include legislation on trading pricing, dividends tax, employment, privatisation, development of free market influences and unemployment.

Economic forecasts are normally prepared on the basis that the existing government policies

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July 2015 www.fb.com/studycpa continue. Other factors are political stability in a country, which will influence the rate of

investment in the country.

Technological environment

This is a rapidly changing area and organisations should be very careful with it. It can influence the following:-

 Changes in production techniques e.g. the use of robots, Computer Aided Manufacture

 Products that are made or sold e.g. software

 How services are provided. ATMS for banks

 How to identify markets creation of customer databases.

Much has been made of the application of new technologies to communications and business especially the Internet.

The impact of information as the raw material in a knowledge-based economy is huge. Within an industry failure to exploit information and new production technology can lea to an

organisation failing behind its rivals and losing its competitive edge.

The distribution of services has change and there has been removal of entry barriers in certain industries such as banking and insurance. Much lower start up costs has created threats to the established players, which if they do not respond to, could lead to decline. New technology leads to innovation of substitutes for example in the pharmaceutical industry, biotechnology and data storage devices.

Examples of changes in production processes includes use of robotics and computers. This has led to lower cost of production, better quality goods or both.

Competitors.

INTERNAL CONSTRAINTS (within the firm)

The following are constraints that originate from within the organization but which management must take care of.

i. Constraints imposed by organizational charters and guidelines

Many organizations such as government agencies, religious bodies and corporations have written documents which constitute corporate charters, by-laws, policies, rules, constitutions etc. These documents spell out what the organization can or cannot do and managers in these organizations are limited by what these documents say.

ii. Constraint imposed by organizational policies, procedures, rules and strategies

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July 2015 www.fb.com/studycpa These predetermined plans place limits on what an organization can or cannot do e.g. policy specifying that all sales be to wholesalers tells managers that sales will not be made to ultimate consumers at all, or rules against members of the same family working in the same

organization.

iii. Constraints imposed by limited money and personnel

No organization has unlimited capital. Because of insufficient funds, managers may be unable to hire the best qualified people, purchase the best equipment and land and so forth. Therefore the organization will be restricted in what actions it can take. Managers may also be limited by the personnel (employees) within the organization who may not have the necessary skills or knowledge to carry out planned activities. Employees may also resist changes that affect them in the organization.

iv. Constraints imposed by higher level management

Policies, procedures and rules such as noted above are developed by higher level

management. In addition higher level managers develop the strategies that direct the actions of other members of the organizations. The actions of higher management can therefore limit the actions of the lower level management.

v. Constraints imposed by custom and culture.

Custom is defined as long established, continuous, reasonable and constant practices considered as unwritten law and resting for authority on long consent. Custom defines the unique ways of how things have always been done in the organization.

vi. Constraints imposed by stockholders and Boards of Directors

Shareholders have the opportunity to influence a company by exercising voting rights.

Note:

The five elements of the external environment (i.e economic socio-cultural, political, legal, international and technological) affect the organization indirectly. Managers should monitor the indirect action factors for early warning signs of change that might later affect the organization.

Managers can only adjust to the external environment through the planning process, or by changes in the formal organization structure i.e through flexibility which involves a conscious structuring of the organization so that it will best meet the demands of the environment at any given time.

The direct action factors of the environment consists of the organizations stakeholders i.e. the groups which have direct impact on the organization. These are either internal like employees, shareholders and the Board of Directors or external like customers, suppliers, competitors, labour unions, financial institutions, the media and competitors. Managers need to balance the interest of all those stakeholders for the good of the organization. This can be done through such actions as (advertising, lobbying and collective bargaining).

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MANAGER AND THE MANAGER OF THE ENVIRONMENT

In document Strategy, Governance and Ethics (1).pdf (Page 103-108)