1.4 The Internal and External Environments

As organizations compete in the global marketplace, management must be aware of changes in both the internal and external environments. The internal environment includes factors that the organization controls. For example, the organization's culture, product development, mission and strategy are all part of the internal environment. On the other hand, the external environment includes those factors that are outside of the organization; while management has no control over these items, the company must prepare for and respond to the factors. Elements of the external environment include the economy, changes in technology, regulation, competition, socio-economic factors, and others.

Several areas within the organization influence HR activities, including top management, organizational strategy and culture, technology, structure, and size. For example, top management's values (part of the internal environment) shape the organizational culture and strategy, which in turn determine the structure of the firm. What is most important, though, is understanding how each of these factors within the internal environment influences HR policies.  

Culture

The corporate culture represents the organization's value system.  The culture identifies people's values and assumptions about their willingness to work, their ethics, and the way they should be treated.  Culture is often reflected in the company's HR policies and practices.  For example, Dofasco, one of the world's largest steel producers, has the motto "Our product is steel, our strength is people." While no two organizational cultures are the same, every organizational culture has a significant impact on HR functions and activities because HR activities normally reflect and articulate corporate culture. In other words, the HR practices chosen for implementation come from a menu of available options that is dictated by the prevailing organizational culture of the firm.

Technology

Technology within the organization is also part of the internal environment (note that technology of the industry at large and of competitors is part of the external environment). Technology generally refers to the equipment and knowledge used to produce goods and services and may vary greatly by industry.  It is well known that the prevailing technology to manufacture automobiles is the assembly line, while the educational technology offered to college and university students often integrates online text, videos, assessments, and courseware to facilitate student learning. Assembly line technology, for example, has had a distinct impact on the way jobs are designed and the type of employees that are hired and trained to manufacture cars. Because education is highly dependent on the quality of instruction, emphasis on the selection, monitoring, and training of professors will be entirely different as technology becomes more deeply integrated with education.

Organizational Structure

As technology use has increased, organizational structures have become flatter and flatter. A "flat" structure is one that has fewer managers or a smaller management hierarchy. While this trend is occurring for a number of reasons, one reason is that, with technology and computers, close supervision of employees is unnecessary. Furthermore, technology allows work to be performed during non-traditional hours, away from physical manufacturing plants and offices. The trend has been for companies to restructure themselves to be most effective in terms of quality and cost, and this is often carried out by reducing the number of levels of employees and by decentralizing the decision-making process. 

Organizational Size

Organizational size is also an important factor in determining HR activities. With some exceptions, the larger the organization, the more developed its internal labor market is, and the less reliant it is on the external labor market. This means that decisions on how to pay employees, how to evaluate them, how to classify jobs, and how to determine career paths are less dependent on what is going on outside the organization or among its competitors.  With more reliance on the internal labor market, the organization has more discretion in determining and selecting HR policies. While organizational culture, technology, structure, and size are all part of the internal environment, management must also respond to, and prepare for, the external environment.

The Economy

The economy is a critical element of the external environment. Local, state, and national economic events can have a significant impact on HR activities. A strong economy tends to decrease unemployment, increase wages, make recruitment more competitive, and increase the desirability of training. On the other hand, a weak economy tends to increase unemployment, diminish wage demands, make recruitment less competitive, and reduce the need for training and development of current employees. HRM has a major role in both strong and weak economies, although the priorities and nature of activities and functions will change depending on the economy.

International Competition

Human resource management is influenced not only by the domestic external environment, but also by the international external environment, including changes in economic developments throughout the world. For example, when the North American Free Trade Agreement (NAFTA) was created in 1994, the nature of work relationships among the United States, Canada, and Mexico changed dramatically. Because corporations were forced to become more competitive, HR policies and practices within many firms changed significantly.

Responding to the External Environment: SWOT Analysis

A useful tool to assess a firm's internal abilities and capacities along with forces in the external environment is the SWOT analysis. SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. Environmental scanning and SWOT analysis are sometimes referred to as strategic assessment tools and are commonly used to establish a level of understanding needed for a successful plan. An environmental scan and a SWOT analysis can help confirm or refute common perceptions about where a company stands in relation to its competitors. Conducting an environmental scan involves collecting external and internal information to assist the organization in focusing on the appropriate short- and long-term goals.

Play to Strengths

Strengths refer to the firm's core competencies, abilities, and capacities that provide an advantage when meeting the needs of target customers. For example, production costs, marketing skills, brand image, technology, design, and financial resources represent potential strengths for a firm. Strengths are meaningful only through the eyes of customers. Strengths that create value for the firm's chosen customers provide competitive advantages for the firm. Nike, for example, creates value for target customers by playing to strengths of image and product performance.

Moderate Weaknesses

Weaknesses refer to the limitations a firm faces when seeking to deliver value to customers. Like strengths, weaknesses are only meaningful when viewed through the eyes of customers. Marketers must try to make weaknesses seem less significant. In 2008, Domino's Pizza struggled to stay relevant to its customers. Although the company dominated with respect to price and convenience, it performed poorly in taste. Loyal customers were leaving Domino's for competitors' products. In a major effort to win back customers, Domino's moderated this weakness by pursuing an extensive reinvention initiative.

Make the Most of Opportunities

Favorable conditions and trends in the external environment represent opportunities for marketers. For the company to benefit, these opportunities must be exploited. Skullcandy recognized an opportunity with the trend of digital audio devices such as MP3 players and iPods. The company exploited this opportunity with a unique line of headphones, earbuds, and device docks.

Manage or Eliminate Threats

Conditions, trends, and barriers in the external environment that hinder firm performance represent threats. Marketers manage threats by either acting upon them or avoiding them. For example, Walmart, the world's largest retailer, faces the threat of consumer perceptions that the big company is insensitive to environmental issues. To counter this threat, Walmart launched aggressive sustainability initiatives by seeking to use 100% renewable energy, creating zero waste, and selling products that help people and the environment.