What is an Organizational Environment? - Definition & Theory

Lesson Transcript
Instructor: Wendy Stewart

Wendy teaches college courses in Business, has a master's degree in Business Administration, and has completed all coursework for a Doctorate of Business Administration

An organizational environment is composed of forces or institutions surrounding an organization that affect performance, operations, and resources. Learn more about the definition, importance, and process of organizational environments in this lesson.

Definition of Organizational Environment

Why are organizations affected by their environments? In order to answer this question, let's look at two very different organizations: Basic Bolt Company and Terrific Technologies.

Basic Bolt Company sells bolts to large manufacturing companies as components to make large machines and engines. They face a relatively static environment with few changing environmental forces. Currently, there are no new competitors in their market, few new technologies being discovered, and little to no activity from outside groups that might influence the organization.

Opposite from this, Terrific Technologies is an internet marketing startup that faces a dynamic environment with rapidly changing regulations from the government, new competitors constantly entering the market, and constantly shifting consumer preferences.

These two companies have very different organizational environments. Organizational environments are composed of forces or institutions surrounding an organization that affect performance, operations, and resources. It includes all of the elements that exist outside of the organization's boundaries and have the potential to affect a portion or all of the organization. Examples include government regulatory agencies, competitors, customers, suppliers, and pressure from the public.

To manage the organization effectively, managers need to properly understand the environment. Scholars have divided environmental factors into two parts: internal and external environments.

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  • 1:31 Internal Environment
  • 2:40 External Environment
  • 3:35 SWOT Analysis
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Internal Environment

An organization's internal environment consists of the entities, conditions, events, and factors within the organization that influence choices and activities. It exposes the strengths and weaknesses found within the organization. Factors that are frequently considered part of the internal environment include the employee behavior, the organization's culture, mission statement, and leadership styles.

The internal environment of Basic Bolt Company is very different from Terrific Technologies. Basic Bolt Company's leadership is results- and deadline-driven, distant, detached, and generally unconcerned about their employees' welfare or morale. Their employees are not especially dedicated to the company and are happy to leave if the opportunity arises.

Terrific Technologies' leadership style is extremely hands-on using a high degree of creativity, ingenuity, and imagination in solving organizational problems. Their managers are concerned about employee morale and welfare and go above and beyond what is necessary to make their employees feel valued and important. Their employees are very loyal to the company and are typically happy with their jobs.

External Environment

An organization's external environment consists of the entities, conditions, events, and factors surrounding the organization that influence choices and activities and determine its opportunities and threats. It is also called an operating environment. Examples of factors affecting an organization's external environment include customers, public opinion, economic conditions, government regulations, and competition.

The external environment of the Basic Bolt Company and Terrific Technologies will be different as well, but a few external factors will potentially affect both companies. Basic Bolt Company's customers will have very different wants and needs compared to Terrific Technologies' clientele, but both will want a superior product or service at the lowest possible price. Both companies will face governmental regulations, but they will likely be subject to different laws and legislation. The condition of the economy will also affect both companies.

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