External environment refers to the major factors and forces outside the organization that have the potential to significantly affect the performance of an organization. External environment is divided into two parts i.e. mega environment or general environment and specific or task environment. External environment can significantly influence the effectiveness of an organization to large extent. The explanation of mega or general environment is given below.
General environment or mega environment is an important segment of external environment. The reason it is called mega environment is that it only refers to the broad trends and conditions in the societies within which an organization operates. The major elements of general environment are: legal-political, economic, technological, international and socio cultural. Since such elements are beyond the ability of a single organization to affect or alter them therefore they cannot be influenced in the short run. The elements of general environment are explained below.
• Technological Element
It refers to the current state of knowledge about the production of goods and services. Technological environment can positively or negatively impact the overall success of an organization. Different industries such as automobile, telecommunication, computer etc. are greatly affected by frequent changes in technology. Therefore in order to remain competitive, organizations must stay abreast of current technological developments.
• Economic Element
Prevailing economic conditions have great impact on the management practices in an organization. Different economic factors such as inflation, interest rates, changes in per capita income, stock market fluctuations etc affect the profitability and success of an organization. For example if the per capita income of people decreases, it will decrease their purchasing power which will ultimately lower the demand for goods and services. Due to lower demand, prices fall and the profit of an organization shrink.
• Legal-Political Element
Legal-political element refers to the legal and governmental systems within which an organization must function. There are various federal, state, and local government regulations which can significantly influence the overall performance of an organization. For example civil Rights Act of 1991, Americans with Disabilities Act of 1990 etc are some of the US legislations affecting the businesses of different organizations. Similarly political stability and positive attitude of elected government official towards the business of an organization is very important for the organization’s progress and prosperity.
• Socio-Cultural Element
Socio-cultural element includes customs, norms, behaviors, societal values, beliefs etc. Socio-cultural aspects are subject to change therefore managers must adapt their practices to the changing expectations of the society. It is necessary to monitor the prevailing trend from time to time because such changes might offer new opportunities or pose significant threats. For example if there is shift in behavior of people for certain product, the demand of the product will increase along with increase in price.
• International Element
The political, social, cultural, and economic situations of one country are significantly different from other country. Therefore development in a country outside an organization’s home country has great influence on the success of organization. For example a slight increase in the value of dollar has great influence on the ability of an organization to conduct business abroad. Therefore those organizations which are purchasing raw materials from USA will find it difficult to purchase from them because of increase in the cost of production due to higher prices. Conversely, if the dollar falls against foreign currencies, demand for the raw materials will increase.