Internal and External Environments in Organizations

Subject: Management
Pages: 6
Words: 1651
Reading time:
7 min
Study level: PhD


Organizations today face major challenges in maintaining their commercial success in order to ensure their survival. This holds true for both small and large organizations as the market becomes increasingly competitive. Success is therefore pegged on a keen understanding of the internal and external influences that affect the organization. Research indicates that the environment (both internal and external) of an organization has some impact on its performance and as such, organizations have to adjust themselves to changes in the environment in order to ensure survivability. Albright (2008) asserts that good knowledge of the environment within which the organization operates and how the environment affects it is integral to ensuring that the organization achieves its goals of increased productivity. This paper will set out to discuss the external and internal environments of an organization. The paper will analyze how the external environment impacts the internal environment and the decisions that managers must make as a result of this interaction.

Organizational Environments


Albright (2008) defines the external environment as one which includes “elements that exist outside the boundary of the organization that have the potential to affect the organization (p.40). An organization faces a number of external environments which can impact it. The industry environment is the most significant external environment and it is imperative to examine the structure of the industry within which the organization operates. By doing this, the organization will be able to identify the key competition and better understand the role that competitors play in the market (Albright, 2008).

The local, national and international economies can also affect an organization especially if its size, scope and market is expansive. The economic environment will determine the types of opportunities and threats that a company faces and its ability to expand will be determined by this environment (Jones & George, 2009). If there are high rates of inflation and recession, the growth of the organization will be deterred and if the situation is severe the failure of the organization may be precipitated. On the other hand, an expanding economy which is characterized by higher consuming power by the customers will give an organization the opportunity to expand its base of operations.

Technology also greatly impacts the organization since new technology can affect overall productivity. New innovations can change the way that production activities are carried out and give an organization advantages over its competitors who may not be using the technology. The organization needs to keep monitoring changes in technology and take advantage of new technology that increases efficiency (Ming-Chang & Tzu-Chuan, 2007).

Regulatory policies and guidelines have significant impacts on the organization. Changes in laws and regulatory guidelines for a certain industry will impact the organization (Norzalita & Norjaya,2010). For example, laws on minimum wages will have an impact on how the organization remunerates its work force. The organization should therefore keep abreast with regulatory information on issues ranging from employment practices, environmental policies, and intellectual property to name but a few.

The political environment within which the organization operates also has a huge influence on the organization (Jones & George, 2009). This influence can be both direct and indirect in that if the political climate is volatile, the organization will not be able to operate optimally and there may be restrictions on trade flows. A nation’s politics may also result in changes in existing policies and laws which may force an organization to change the manner in which it did business before.


The organization also has an internal environment which is made up of elements existing in the boundary of the organization. A key component of the internal environment is the current employee base of the organization. They make up the workforce responsible for working towards the achievement of organizational goals and objectives. Thompson and Strickland (2010) declare that the employee base of an organization is its most important asset and their contributions enable the organization to meet its strategic goals.

The organization which is regarded as a system of meanings that shapes the day to day actions of the company’s members is an important internal factor. Daft and Dorothy (2010) reveal that the organizational culture is an integral part of the internal organizational environment and it includes “the key values, beliefs, understandings, and norms that organization members share” (69). The corporate culture defines employee behavior and it therefore dictates how well the organization is able to adapt to the external environment.

Organizational identity includes the company’s staff perception of the central and distinctive attributes about their company. The company’s identity will influence how managers make decisions since the company identity influences the manager’s perception of what kind of company the organization is and the courses of action that it can or cannot engage in (Howard-Grenville, Nash & Cary, 2008).

Another internal factor is organizational self-monitoring which presents a set of choices on how the company presents itself to outsiders (Norzalita & Norjaya, 2010). Self-monitoring also represents how the organization responds to its impressions of outsiders and the values placed in living by socially appropriate portrayals.

Impacts of Environment on Decision Making

By looking at the environmental environment, managers are able to acquire information on the events and trends that affect the organization. From this information, key managers are empowered to make sound decisions on the future of the organization. Today’s marketplace is dynamic in nature and rapid changes occur with new and emerging business practices being adopted at a fast pace (Norzalita & Norjaya, 2010). An organization that fails to keep up with these changes will not be able to compete favorably with its rivals. Failing to keep up with changes for example in technology and regulations will cause an organization to be blindsided and loss its competitive advantage. Considering the external environmental forces will help managers to consider the new and emerging business practices and adapt as required to them.

The organizational structure which is a component of the internal environment shapes how managers make decisions. Howard-Grenville et al. (2008) state that the particular organizational structure in place will compel the manager to make use of certain “favored strategies for action” when they are dealing reacting to the external environment. The manager will make use of the routines and the hierarchy that is in place to decide on the best cause of action. The formal structures of the organization will dictate who does what and it will therefore stipulate which members of the organization will be required to implement changes necessitated by external factors.

The identity of an organization will be influenced by the events taking place on the outside world. For example, market changes which are driven by changes in society may cause adjustments in employees’ impressions of the company’s strengths and influences in the market. Efforts by the manager to shape the identity of the organization will therefore be strongly influenced by the external environment. The culture will determine whether the manager will make decisions by himself or whether he will seek to reach a consensus with other members of the organization. The Culture will also determine if the organization borrows ideas from other companies with regards to issues such as technology or whether it uses its own “homegrown” solutions (Rainey, 2008). The organization may be required to make changes on its corporate culture in response to the external environment.

Observing market changes will also help in the implementation of marketing strategies and coming up with new products to meet the demands for a given product or service. By considering the customer taste and opinion, the managers can be able to decide on more effective advertisements. Such a move will ensure that the organization has a competitive edge since its advertisement will be structured in such a way that it appeals to and influences customer taste.

Regulatory policies may dictate how managerial decisions are undertaken. For example, if an organizations operations result in significant pollution problems for the communities within which they operate, they would be forced to take action to curb this. Managers could react to the issue by implementing sophisticated environmental management systems so as to comply with government environmental regulations and also foster good faith with the community.

Corporate Social Responsibility (CSR) which entails the organization acting in a manner that is beneficial to the community has become an important concept in today’s business world. Organizations are today forced to take CSR, which requires organizations to act in an ethical and socially responsible manner, into consideration if they hope to remain competitive and foster greater social cohesion. Managerial incentives will be determined by the importance attached to CSR by a given society will determine the emphasis that the manager gives CRS activities. Howard-Grenville et al. (2008) define managerial incentives as “formal and informal inducements that might encourage or dissuade a manager from taking some form of behavior” (p.79).

The public has in the previous decade begun to show great concern on ethical behavior by managers. This concern has been triggered by the financial meltdown of 2008 whose results are still being felt by many countries today. Organizations are today required to engage in ethical behavior and refrain from deception or fraud.


The paper set out to discuss the external and internal environments of an organization and how the two impact decision making by managers. It began by asserting that the lack of a good understanding of the business environment will hamper the effectiveness and efficiency of an organization and therefore threaten its sustainability. The paper has highlighted the importance of environmental scanning in the decision making process. It has demonstrated that the organization’s practices are influenced by factors including competition, regulatory requirements, and technological innovation, evolving social demands and institutional norms, and economic pressure. The paper has underscored the fact that while external factors influence an organization’s actions, internal factors shape how the external conditions are regarded and what solutions are deemed appropriate for addressing any identified problems.


Albright, S.K. (2008). Environmental scanning: radar for success. The Information Management Journal, 12(2), 38-45.

Daft, R. & Dorothy, M. (2010). Understanding Management. NY: Cengage Learning.

Howard-Grenville, J., Nash, J. & Cary, C. (2008). Constructing the License to Operate: Internal Factors and Their Influence on Corporate Environmental Decisions. Law & Policy, 30(1), 73-107.

Jones, G.R. and George, J.M. (2009). Contemporary Management. (6th. Ed). New York: McGraw-Hill.

Ming-Chang, H. & Tzu-Chuan, L. (2007). The impact of external environment on Organization. Journal of Behavioural Studies in Business, 6(7), 1-10.

Norzalita, A.A. & Norjaya, M. Y. (2010): How Will Market Orientation and External Environment Influence the Performance among organizations? International Business Research Journal, 3(3), 154-164.

Rainey, D. L. (2008). Sustainable Business Development: Inventing the Future through Strategy, Innovation, and Leadership. Cambridge: Cambridge University Press.

Thompson, A. A. and Strickland, A. J. (2010). Strategic Management: Concepts and Cases. (12th. Ed.). NY: McGraw Hill Higher Education.