Module 2 Challenges in the External Environment PDF

**MODULE 2** **CHALLENGES IN THE EXTERNAL ENVIRONMENT** LEARNING OBJECTIVES =================== After completing this module, you are expected to: i. perform environmental scanning; =============================== ii. employ SWOT analysis using a company; iii. analyze and evaluate the soc...

**MODULE 2** **CHALLENGES IN THE EXTERNAL ENVIRONMENT** LEARNING OBJECTIVES =================== After completing this module, you are expected to: i. perform environmental scanning; =============================== ii. employ SWOT analysis using a company; iii. analyze and evaluate the social, political, economic, technological, and environmental forces affecting the country; and iv. identify external forces that may prove beneficial or detrimental to an organization. [**Module 2 Challenges in the External Environment**](about:blank) LEARNING ACTIVITIES =================== **Individual Activity** ASSESSMENT/EVALUATION ===================== I. *Synchronous Test* with time limit. II. *Asynchronous Learning* ASSIGNMENT ========== Individual Assignments: ======================= 1. What is the external environment? What are the forces interplaying in the external environment? 2. In relation to critical social concerns today in the external environment, how do changing social structures, the world's aging population and great demand for health services, the evolving sophistication in the lifestyle of peoples, and cross-cultural diversity impact organizations? 3. How do technological advances observed in the fields of communication, business, banking, education, medicine, and security, contribute to the decision-making of organizations? **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. **Sources of Strategic Information** **Strategic information** consists of the facts and data used by organizations to assist them in achieving their vision, mission, and goals. Strategic information can be drawn from both external and competitive environments. Both external and internal environments symbiotically interplay and directly or indirectly affect organizations. Information is either primary or secondary. **Primary data** are gathered through personal experience, observation, and experimentation while **secondary information** are data collected from reports, internet sources and other published materials **Modes of Environmental Scanning** Scanning the environment involves two processes. The first one is looking at or simply viewing information, and the second one is looking for or searching for information. According to Aguilar (1967), there are four ways of environmental scanning. They are **undirected viewing, conditioned viewing, informal search, and formal search.** In summary, entities possess organizational intelligence. This mode of thinking directs them to scan the environment. The importance of conducting environmental scanning cannot be overemphasized as knowledge of the business landscape is needed to implement one\'s strategies. There are different modes of scanning the environment and there are likewise different approaches to benefit from it. These searches will depend on the needs of the organization. **The SWOT Matrix Analysis** The **SWOT matrix** is a structured assessment tool used to evaluate an organization, industry, a place or even a person in terms of set parameters like strengths, weaknesses, opportunities, and threats. Credited to Albert Humphrey in 1960, the SWOT matrix classifies strengths and weaknesses as internal dynamics characterizing an organization and threats and opportunities as external influences to the organization. Specifically: - Strengths are features that organizations possess, thus, giving it significant advantage over others. - Weaknesses are characteristics that place organizations at a disadvantage relative to others, and may just be limitations or vulnerabilities of organizations. - Opportunities are possibilities in the external environment that organizations can exploit to their advantage. - Threats are challenges in the external environment that can cause problems to organizations. Humphrey\'s 2x2 matrix model (2005) suggests actions for issues arising from the SWOT analysis according to four different categories. The recommended practical and direct actions are presented in Table 2.1 +-----------------------+-----------------------+-----------------------+ | **Table 2.1 SWOT | | | | Analysis Matrix** | | | +=======================+=======================+=======================+ | | **Strengths | **Weaknesses | | | (Internal)** | (Internal)** | +-----------------------+-----------------------+-----------------------+ | **Opportunities** | **Strengths/Opportuni | **Weaknesses/Opportun | | | ties** | ities** | | **(External)** | | | | | Obvious natural | Potentially | | | priorities | attractive options | | | | | | | Likely to produce | Likely to produce | | | greatest ROI | good returns if | | | | capability and | | | (Return on | implementation are | | | Investment) | viable | | | | | | | Likely to be quickest | Potentially more | | | and easiest to | exciting, | | | implement | stimulating, and | | | | rewarding than S/O | | | Probably justifying | due to change, | | | immediate action | challenge, surprise | | | planning, feasibility | tactics and benefits | | | study, or business | from addressing and | | | plan | achieving | | | | improvements | +-----------------------+-----------------------+-----------------------+ | | Primary Question: | Primary Question: | | | \"If we are not yet | \"What is actually | | | looking at these | stopping us from | | | areas and | doing these things, | | | prioritizing them, | provided they truly | | | then why are we | fit strategically and | | | not?\" | are realistic and | | | | substantial?\" | +-----------------------+-----------------------+-----------------------+ | **Threats** | **Strengths/Threats** | **Weaknesses/Threats* | | | | * | | **(External)** | Easy to defend and | | | | counter | Potentially high risk | | | | | | | Only basic awareness, | Assessment of risks | | | planning, and | is crucial. | | | implementation are | | | | required to meet | When risk is low, | | | these challenges. | ignore these issues | | | | and do not be | | | Investment in these | distracted by them. | | | issues is generally | | | | safe and necessary. | When risk is high, | | | | assess capability | | | Primary Question: | gaps and plan to | | | \"Are we properly | defend or avert in | | | informed and | specific controlled | | | organized to deal | ways. | | | with these issues and | | | | are we certain there | Primary Question: | | | are no hidden | \"Have we accurately | | | surprises?\" and | assessed the risks of | | | \"Since we are strong | these issues and when | | | here, can any of | risks are high, do we | | | these threats be | have specific | | | turned into | controlled reliable | | | opportunities?\" | plans to avoid/ | | | | avert/defend?\" | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ Although the SWOT matrix has been considered an old process for evaluating the strengths, weaknesses, opportunities, and threats of an organization, it has constantly proven its worth and functionality when it comes to assessment. Divided into internal and external environments, it clearly focuses on the status of an organization. As a result, logical inferences can be drawn and corresponding strategies can be recommended. **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 merging 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. - **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. - **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. **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 simultaneously 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. - **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. - **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 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. These forms of man-made abuses and destructions are alarming. One realizes that care of the environment is a serious concern and responsibility for everyone: the individual, the organization, the community, and the government. In short, environmental preservation is a global priority for everyone.  While some of the external environment forces do not directly affect us, they are significantly vital to an organization. The global landscape, as earlier mentioned, cannot allow an organization to run away from these realities. Somehow, these social, cross-cultural, geopolitical, economic determinants will affect the way organizations manage themselves in the near future. In some instances, these forces may be the reason for their bankruptcy or eventual closure. **END OF MODULE 1 A Strategic Management Model**