How Internal and External Factors Drive Organizational Change

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Managers must recognize and respond to all factors that affect their organizations. This lesson describes how the internal and external environments of an organization drive change within the company.

Navigating Change in Organizations

Navigating in today's chaotic business environments is much like trying to steer a tiny boat back to shore while caught in the center of a hurricane. There are many forces at work that a person will need to respond to in order to make it safely back to port. Just like this tiny ship, today's organizations and their managers are faced with a significant amount of factors that require an immediate response, often in the form of organizational change. The forces that drive this change in business are known as the internal and external environments. This lesson will discuss how both the internal and external environments of an organization induce change.

The Internal Environment

The internal environment of an organization refers to events, factors, people, systems, structures and conditions inside the organization that are generally under the control of the company. The company's mission statement, organizational culture and style of leadership are factors typically associated with the internal environment of an organization. As such, it is the internal environment that will influence organizational activities, decisions and employee behavior and attitudes. Changes in the leadership style, the organization's mission or culture can have a considerable impact on the organization.

The External Environment

The external environment are those factors that occur outside of the company that cause change inside organizations and are, for the most part, beyond the control of the company. Customers, competition, the economy, technology, political and social conditions and resources are common external factors that influence the organization. Even though the external environment occurs outside of an organization, it can have a significant influence on its current operations, growth and long-term sustainability. Ignoring external forces can be a detrimental mistake for managers to make. As such, it is imperative that managers continually monitor and adapt to the external environment, working to make proactive changes earlier on rather than having to take a reactive approach, which can lead to a vastly different outcome.

Environmental Scanning and Change

In order for managers to react to the forces of internal and external environments, they rely on environmental scanning. Environmental scanning refers to the monitoring of the organization's internal and external environments for early signs that a change may be needed, to accommodate potential opportunities or threats and to make adjustments to allow the company's strengths to combat its weaknesses. If you recall, one common type of environmental scan is the SWOT analysis, which looks specifically into the strengths, weaknesses, opportunities and threats of the internal and external environments. A manager will begin analyzing the internal environment by looking into inefficiencies inside the organization and will then look outside to the external environment and things occurring independent of the organization. Environmental scans allow managers to use the knowledge gained during the scanning process to decide what strategic steps, or changes, the organization needs to take to create or maintain a competitive advantage.

Changing for the Internal Environment

To better understand changes in the internal environment, let's look at the following example. After graduating from college, Cassandra decided to buy an existing tanning salon in her community. Before Cassandra purchased the salon, it was in terrible financial trouble. Many of the employees complained about the general manager's leadership style, and the staff were often confused about what products and services they offered at the salon because the manager continuously implemented his next 'bright idea' with little warning, most of which were complete failures.

Cassandra knew that if she was ever going to be able to bring any level of success to the salon, she needed to make several changes to the internal environment of the tanning salon. The first thing Cassandra did was to fire the existing manager because of his ineffective leadership style. She replaced the manager with someone who practiced a leadership style that was better aligned with the company and its employees. Next, Cassandra spent time developing a clear mission of the company and communicated the new mission to all employees. Over the next several months, Cassandra spent time getting to know her employees and worked hard to foster a culture that was positive and rewarding. All of these changes made by Cassandra were necessary due to the internal forces that were pushing for change, and with the help of her employees, Cassandra was able to bring the much needed changes to the internal environment of the company.

Changing for the External Environment

If we return to the example of Cassandra's tanning salon, we can also find some external forces that required additional change at the tanning salon. If you remember, one of the major issues the staff was having with the previous general manager was his continuous changing of products and services at the salon. What his staff did not know was that he was trying to respond to external factors relating to changing customer demands. As a result, Cassandra spent time talking to her customers to find out what they really want in a tanning salon and was sure to make any changes necessary to accommodate those demands. Additionally, because of the struggling economy, Cassandra needed to ensure her pricing was affordable to her clients and comparable to what her competition was offering for similar tanning services and products at their salons.

Lesson Summary

Let's review. The internal environment of an organization refers to events, factors, people, systems, structures and conditions inside the organization that are generally under the control of the company. The company's mission statement, organizational culture and style of leadership are factors that are typically associated with the internal environment of an organization. The external environment are those factors that occur outside of the company that cause change in organizations and are, for the most part, beyond the control of the company. Customers, competition, the economy, technology, political and social conditions and resources are common external factors that influence the organization.