Strategic Management in Small and Medium Enterprises - Literature review Example

WHY IS IT IMPORTANT FOR MANAGERS TO UNDERSTAND THE EXTERNAL FORCES ACTING ON THEM AND THEIR ORGANISATIONS? Name Institution Professor Course Date Introduction External forces entail those facets that happen outside an organisation and trigger change within organisations. These forces are beyond an organisation’s control. The forces include the economy, suppliers, customers, resources, competition, regulatory, technology and social and political conditions. It is important that a firm’s management understand the external forces acting on them and their organisations. Apparently, external forces involve the environment in which a firm operates. While the external forces take place outside a firm, they hold a major influence on a firm’s operations, long-term sustainability and growth. Taking for granted external forces can be harmful to managers and their organisations. Understanding the external forces facilitate assessment and adaption of a firm’s external environment. Understanding these forces helps managers and firms to make proactive changes instead of having to take reactive strategies that may be detrimental to the firm. This paper explains why it is imperative for managers to comprehend the external forces acting on them and their organisations. The external forces comprise of a firm’s environment. According to Robbins, Bergman, Stagg and Coulter (2011, p.109), a firm’s specific environment comprises of four major elements that hold a direct effect on manager’s actions and decisions. The four components of a firm’s environment are pertinent to the attainment of organisational objectives and goals. The major forces that make up a firm’s explicit environment include pressure groups, competitors, supplier and customers. Firms rely on their stakeholders and environment as a recipient of outputs and a source of inputs. Constructive relationships can prompt positive organisational upshots such as enhanced expectedness of environmental shifts, flourishing innovations, increased stakeholders’ trust and flexibility in lowering the effect of the change. Upholding good relationship between organisations and stakeholders promotes improved organisational performance. As a result, putting into consideration the interests of a firm’s stakeholders improves the productivity of a firm. According to Mosley and Pietri (2010, p.265), management holds little control over the powerful impact of external change forces. However, organisations depend on and must interact with their external environment in order to survive. Profits, customers and resources are all from the external environment. As a result, any force that changes or impacts environment affects a firm’s operations and brings about pressures that call for change response. External forces make firms to alter their methods of carrying out business, structure and goals. According to Rao and Krishna (2012, p.126,) managers must hold a profound understanding and acknowledgement of the environment in which they and their firms function. The importance of an organisation environment is equated to a swimmer who must assess the current, distance and obstacles before setting out to swim. When a firm’s environment is not appropriately understood, just like a swimmer who might end up too far downstream or upstream, the firm may fail if its external environment is not carefully assessed and addressed accordingly. Rao and Krishna (2004, p.126) assert that just like a swimmer requires to understand water conditions, organisations and their management must comprehend the fundamental ingredients of their environment in order to manoeuvre correctly among them. In actual sense, because a firm’s environment interact and impact organisational growth and survival, managers must assess the external environment to reveal threat and opportunities. An opportunity is a favourable condition in the firm’s environment that allows it to consolidate and reinforce its position. A threat, on the other hand, is an unfavourable condition that establishes a risk and causes harm to a firm. For instance, the hold up in the United States market is a real peril to Indian software exporters while outsourcing is professed as a prospect to be exploited. In order for a firm to survive, its management must assess its environment to strike a balance amid the resources, values and environment. Given that firms are open systems, environmental factors inexorably influence them. It is the role of managers to guarantee that the influence of environment factors is exploited in a constructive way, leading to a firm’s success. Managers must conduct the environmental analysis (Rao & Krishna 2004, p.126). Apparently, environmental analysis helps companies to adjust to environmental shifts at the appropriate time, eliminating negative impacts triggered by environmental via proactive planning and exploiting opportunities. Understanding the external forces helps firms in establishing early warning systems to deflect perils from competitive forces and establish appropriate strategies to transform problems into prospects. Understanding the external forces of a firm promotes organisational performance through making managers aware of the problems that surface in the firm and how to address them. However, most managers agree that a firm’s external environment is more intricate to comprehend and manage compared to a firm’s internal environment (Rao & Krishna 2004, p.126). The external forces are notably big in number, intricate to assess and predict and are not simply agreeable to advanced policy making and planning. Shifts in the external environment are very important and managers must recognise threats and prospects from outside and react accordingly. Essentially, firms have to address regulatory, technological, political, economic, social, supplier, customers and market linked effects which pose threats and provide prospects frequently. To remain competitive firms must envisage these drifts and set out their resources in a judicious manner. The General Environment: Economic Forces Daft (2011, p.34) establishes that economic forces relate to accessibility, production and distribution of resources. Firms in every industry have been influenced by the 2008 financial crisis. Tight access to credit and diminished consumer spending curtails the growth of firms and leave them scrambling to meet their objectives with restrained resources. Economic facets throw light on the temperament and direction of the economy a firm operates in. Consumption blueprints are controlled through the comparative affluence of a market. Managers need to understand these forces because they facilitate creation and implementation of strategies. While undertaking strategic planning practices, the management needs to centre its attention on economic drifts in the segment that affects a firm’s industry. For instance, the 2008 financial crisis depicted the effect of economic forces on firms. Even businesses not involved with the housing or banking industry witnessed a drop in their revenues. This demonstrates that any shift in the economy can hold detrimental effects on a firm. As a result, it is important that managers gain knowledge of economic forces that might affect their organisations. For instance, when a nation’s GDP drops businesses are affected negatively. Other economic forces that affect an organisation include inflation, interest rates, employment and consumer confidence. For instance, lower interest rates promote increased consumer spending while high inflation rates increase costs of doing business. According to Picard (2002, p.9) managers often try to lessen risks through spreading them across income generating activities to lower the impact of negative upshots from some options. Awareness of opportunities and threats of a firm helps managers in better comprehending their business setting and develop competitive and effective strategies. Gulati, Mayo and Nohria (2013 p.37) state that for firms to win a competitive edge and survive, managers must gain full knowledge of all aspects of their business environment in which their firms operate. Careful assessment and comprehension of a firm’s economic environment facilitates effective production, marketing and distribution of products and services. For instance, the income distribution blueprint impacts the kinds of products demanded by consumers while interests rate hold a great impact on technology projects’ cost. Economic forces hold a major bearing on how the firm balances its capital resources, human resources, financial capital and physical capital such as equipment and infrastructure. In the event that wage rates are increasing, a firm’s management may decide to buy larger-scale equipment which permit higher levels of output with fewer operators. The firm, therefore, can substitute human capital through physical capital but only through an assessment of its economic forces. Political and Legal Forces Political forces entail the influence of political institutions on organisations. One major political force that affects a business is the augmented role of government in businesses. Political and legal forces that affect an organisation include new legislation, health and safety law, trade control, consumer protection law, environmental law, competition regulation, trade law and tax policy to mention but a few. Legal and political forces instigate establishment of environmental protection laws and safety legislation compelled through community expectations and social dynamics. Legislation ranges from wide statements that define manufacturers, employees and employers responsibilities and accountabilities in regard to health and safety to enforceable operating principles. Legislation is an essential factor affecting a firm’s management. For instance, in Australia, firms are lawfully needed to establish strategies that guarantee that their operations meet the inclusive duty of care. Development of such strategies requires that the management fully understand the political and legal forces acting on them and their organisations. According to Mol (2003, p.27) legislation affects the link between an organisation and its employees. Industrial relations rules define the concerns that are negotiable between a firm and its employees. Understanding the legal and political forces affecting a firm helps managers to define rest periods, work hours and allowances. In addition, understanding the current political atmosphere of a region where a firm operates helps managers in developing strategies that ensure business survival. Managers do not only have to address local political outcomes, but also international political outcomes. For instance, political issues in UK can affect Australian exports to UK and imports from the UK. Social Forces Given that a firm is a portion of a wider social system, it has to operate within the blueprint offered by the society. Social factors that affect a firm include values, traditions, societal expectations and trends and consumer psychology. Firms should be sensitive to social drifts when developing and implementing their business strategies. According to Rao and Krishna (2011, p.131), social factors that affect an organisation include lifestyles, opinions, attitudes, and values of people within an organisation’s external environment. The social aspects develop from ethnic, educational, religious, cultural and demographic conditioning. Similar to other external environment forces, social aspects constantly change. As social beliefs, values, and attitudes change, so does the demand for products and services. Social forces affect a firm’s business strategy as they affect suppliers, customers, employees and the communities surrounding a firm. Wilkinson (2013, p.114) asserts that comprehending social forces affecting a firm and its strategy is both complex and important with the rising demands for firms to take responsibility for social costs. Social factors are dynamic and managers must view them in three dimensions which include social, environmental and economic. The interrelations among these dimensions highlight surfacing social issues such as employee welfare, waste management, supplier integrity, product safety and job creation. As a result, managers must understand these social forces in order to be able to prioritise resources and attention on the social factors that hold the greatest impact on their firm. Firms obtain a competitive advantage based on their ability to anticipate and react to social trends that guide employee and consumer behaviour. In this regard, the management of successful firms accentuates their devotion to tacking environmental and social issues via formal policies that promote ethical practices while involving with major stakeholders. The stakeholders include suppliers, regulatory agencies, employees, community and customers. Collaborative efforts with the government or customers instigate innovative services and products to pressing social issues (Wilkinson 2013, p.115). Integration of social responsibility vision to employees and management at all levels aligns organisational practices to attain organisational environment and social goals. The managers of a firm must understand social forces acting on them and their organisations in order to implement sustainable business activities that puts into consideration influences of social forces. The sustainable business practices lower risks of litigation and regulation, promote efficiency and augment revenues through establishing social and economic values for customers. The extent to which a firm tackles social trends in its strategy influences its innovation, customer satisfaction which consequently affects its financial performance. Irresponsible actions damage a firm’s reputation and lowers customer satisfaction that in turn affects the productivity, growth and survival of a firm (Wilkinson 2013, p.115). Understanding social factors acting on managers and their firms promotes ethical practices that promote organisational growth and sustainability. Strategic responses to social factors are crucial for long-term organisational success. Technological forces Development of technology holds a striking effect on modern businesses. Managers should understand technological forces acting on them and their organisations because anticipating shifts in technology and getting the most out of the technological shifts helps firm in wining a competitive advantage. For instance, when Apple anticipated the change to electronic media from CDs, the company established the iPod, the most essential product that promoted the sustainability of a failing firm in 2001 to the biggest firm in the world. Technological forces are aspects that organisations and their management must understand and implement in order to be successful. Managers should comprehend the role of information technology in their organisations. Understanding the trends in technology is indispensable for firms and helps in developing strategic plans. The Industry Environment Political, economics, legal, social and technological factors comprise of a firm’s general environment. However, there are other external forces that relate to an industry and they include suppliers’ power, buyers’ power, competitors, new entrants and substitute goods or services (Delaney & Whittington 20012 p.1290). The five forces by Porter determine the profitability of an industry because they include costs, price and the needed investment of an organisation. The strength of every competitive force is a proportion of an industry structure. Understanding these forces directs managers’ inventive energies towards the aspects of an organisational structure that are more critical to the long-run profitability of the organisation. In addition, understanding these factors increases the odds of establishing a sought-after strategic innovation (Analoui & Karami 2003, p.82). These forces directly affect an organisation and the kinds of strategies it develops to remain competitive. Understanding these forces helps the managers to position their organisations where they can influence the industry aspects and productively defend against their pressure. While the management holds little control over the general environmental facets, the actions of managers hold great effect over industry factors. Given that organisations must develop strategic decisions that entail enduring commitments, managers must not only address the current environment, but also forecast the future. Effective management must asses and forecast the general environment to determine the threats and opportunities. Comprehension of external forces affecting a firm does not only promote organisational growth, but it also promotes organisational sustainability through change and innovation. Managers must understand external forces affecting their firms in order to implement practical strategies that promote organisational survival and adopt novel conducts and ideas that keep the firm running. Successful organisational change must constantly focus on making firms responsive to major advancements such as changing customer preferences, economic shocks, social trends, technological innovations and regulatory norms. Only firms that implement appropriate change strategies through careful assessment of their external forces sustain and survive in the competitive business environment. External and internal forces drive change in organisations. External forces, as indicated earlier, include political, social, economic, legal and technological changes Sengupta, Bhattacharya & Sengupta 2006, p.3). Conclusion External forces refer to those facets that happen outside an organisation and trigger change within organisations. These forces include the economy, suppliers, customers, resources, competition, regulatory, technology and social and political conditions. A detailed understanding of a firm’s external forces, as well as internal forces, is essential for managers to comprehend their firm’s current state and business risks. This understanding includes comprehension of both the industry and general environments. The general environment includes economic, political, legal, technological and social factors while industry environment includes competitors, suppliers, buyers, substitute products and services and the threat of new entrants. Managers should understand these forces because their comprehension facilitates development and implementation of strategies that promote organisational growth and sustainability. Reference List Analoui, F & Karami 2003. Strategic management in small and medium enterprises. UK: Cengage Learning. Daft, R 2011. Management. UK: Cengage Learning. Delaney, P & Whittington, R 2012. Wiley CPA examination review, outlines and study guides. UK: John Wiley & Sons. Mol, T 2003. Productive safety management: A strategic, multi-disciplinary management system for hazardous industries that ties safety and production together. USA: Routledge. Mosley, D & Pietri, P 2010. Supervisory management. UK: Cengage Learning. Picard, R 2002. The economics and financing of media companies. USA: Fordham University Press. Rao, V & Krishna, H 2004. Strategic management. India: Excel Books India. Robbins, S, Bergman, R & Coulter, M 2011. Management. Australia: Pearson Higher Education AU Sengupta, N, Battacharya, M & Sengupta, R 2006. Managing change in organisations. India: PHI Learning Pvt. Ltd. Wilkinson, T 2013. Strategic management in the 21st century. USA: ABC-CLIO Read More