Most organization structures reflect a degree of functional specialization, with individuals occupying roles in departments, units or sections which have titles such as Production, Finance, Marketing, Personnel and Research and Development. These functional areas of the internal organization, and the individuals who are allocated to them, are central to the process of transforming organizational inputs into output. The management of these functions and of the relationships between them will be a key factor in the success of the enterprise and in its ability to respond to external demands for change.
The interdependence of the internal functions can be demonstrated by a simple example. Providing goods and services to meet the market’s needs often involves research and development which necessitates a financial input, usually from the capital market or the organization’s own resources. It also requires, as do all the other functions, the recruitment of staff of the right quality, a task which is more often than not the responsibility of the Personnel department. If research and development activities lead to a good idea which the Marketing department is able to sell, then the Production department is required to produce it in the right quantities, to the right specifications and at the time the market needs it. This depends not only on internal scheduling procedures within the Production department, but also on having the right kind of materials supplied on time by the Purchasing department, an appropriate system of quality control and work monitoring, machinery that is working and regularly serviced, the finished items packed, dispatched and delivered and a multitude of other activities, all operating towards the same end.
The extent to which all of these requirements can be met simultaneously depends not only on internal factors, many of which are controllable, but also on a host of external influences, the majority of which tend to be beyond the organization’s control. To demonstrate this interface between the internal and external environments, two key areas of functional management are discussed briefly below
marketing and human resource management. An examination of the other functions within the organization would yield very similar findings.
Human resource management (HRM)
Human Resource Management (HRM) is the function within an that focuses on recruitment of, management of, and providing direction for the people who work in the organization. Human Resource Management can also be performed by line managers.
Human Resource Management is the organizational function that deals with issues related to people such as compensation, hiring, performance management, development, safety, wellness, benefits, employee motivation, communication, administration, and training.
Human Resource Management is also a strategic and comprehensive approach to managing people and the workplace culture and environment. Effective HRM enables employees to contribute effectively and productively to the overall company direction and the accomplishment of the organization's goals and objectives.
Human Resource Management is moving away from traditional personnel, administration, and transactional roles, which are increasingly outsourced. HRM is now expected to add value to the strategic utilization of employees and that employee programs impact the business in measurable ways. The new role of HRM involves strategic direction and HRM metrics and measurements to demonstrate value.
To illustrate how the different aspects of HRM are influenced by external factors, one part of this function recruitment and selection of staff has been chosen. This is the activity within the organization which seeks to ensure that it has the right quantity and quality of labour in the right place and at the right time to meet its requirements at all levels. To achieve this aim, the organization initially needs to consider a large number of factors, including possible changes in the demand forlabour, the need for new skills and likely labour turn over, before the processes of recruitment and selection can begin. These aspects in turn will be conditioned by a variety of factors such as changes in the demand for the product, the introduction of new technology and social, economic and demographic changes, some of which may not be anticipated or expected by strategic planners.
Once recruitment and selection is ready to begin, a further raft of influences will impinge upon the process, some of which emanate from external sources. In drawing up a job specification, for example, attention will normally need to be paid to the state of the local labour market, including skill availability, competition from other employers, wage rates in comparable jobs and/or organizations, and socio demographic trends. If the quality of labour required is in short supply, anorganization may find itself having to offer improved pay and working conditions simply to attract a sufficient number of applicants to fill the vacancies on offer. Equally, in fashioning its job advertisements and in drawing up the material it sends out to potential applicants, a firm will need to pay due attention to the needs of current legislation in areas such as equal opportunities, race discrimination and employment protection, if it is not to in fringe the law.
Among the other external factors the enterprise may need to take into consideration in recruiting and selecting staff will be:the relative cost and effectiveness of the different advertising media;
existing relationships with external sources of recruitment (e.g. job centres,
schools, colleges, universities);
commitments to the local community;
relationships with employee organisations (e.g. trade unions, staff associations);and
opportunities for staff training and development in local training and educational
institutions. Ideally, it should also pay some attention to possible future changes in the technology of the workplace, in order to recruit individuals either with appropriate skills or who can be retrained relatively easily with a minimum amount of disruption and expense to the organization.
The marketing function
The processes of human resource management provide a good illustration of the interactions between a firm’s internal and external environments. An even better example is provided by an examination of its marketing activities, which are directed primarily, though not exclusively, towards what is happening outside the organisation.
Like ‘management’, the term ‘marketing’ has been defined in a wide variety ofways, ranging from Kotler’s essentially economic notion of an activity directed at satisfying human needs and wants through exchange processes, to the more managerial definitions associated with bodies like the Chartered Institute of Marketing.5 A common thread running through many of these definitions is the idea that marketing is concerned with meeting the needs of the consumer in a way which is profitableto the enterprise. Hence, strategic marketing management is normally characterized as the process of ensuring a good fit between the opportunities afforded by the market place and the abilities and resources of an organisation operating in it.
This notion of marketing as an integrative function within the organisation linking the needs of the consumer with the various functional areas of the firm is central to modern definitions of the term and lies at the heart of what is known as the ‘marketing concept’. This is the idea that the customer is of prime importance to the organization and that the most significant managerial task in any enterprise is first to identify the needs and wants of the consumer and then to ensure that itsoperations are geared to meeting these requirements profitably. Though it would be true to say that not all organisations subscribe to this view, it is generally accepted that the successful businesses are predominantly those with a customer rather than a production or sales orientation. Equally, the evidence suggests that the need to adopt such a customer-centred approach applies not only to private sector trading
organizations, but also increasingly to public sector enterprises and to bodies notestablished for the pursuit of profits but for other purposes (e.g. charities, political parties, trade unions).
When viewed from a customer perspective, marketing can be seen to comprise a range of activities that go beyond the simple production of an item for sale. These include:
Creating a marketing information system.
As already indicated, in carrying out these activities the firm is brought into contact with a range of external influences of both an immediate and indirect kind. This external marketing environment can have a fundamental impact on the degree to which the firm is able to develop and maintain successful transactions with its customers and hence on its profitability and chances of survival.
To illustrate how a firm’s marketing effort can be influenced by external factors,the following brief discussion focuses on ‘pricing’, which is one of the key elements of the ‘marketing mix’, that is, the set of controllable variables which a business canuse to influence the buyer’s response, namely, product, price, promotion and place –the 4Ps. Of all the mix elements, price is the only one which generates revenue, while the others result in expenditure. It is therefore a prime determinant of a firm’s turnover and profitability and can have a considerable influence on the demand for its products and frequently for those of its competitors
Leaving aside the broader question of a firm’s pricing goals and the fact that prices will tend to vary according to the stage a product has reached in its life cycle, price determination can be said to be influenced by a number of factors. Of these, the costs of production, the prices charged by one’s competitors and the price sensitivity of consumers tend to be the most significant.
In the case of cost-based pricing, this occurs when a firm relates its price to the cost of buying or producing the product, adding a profit margin or ‘mark-up’ to arrive at the final selling price. Such an approach tends to be common amongst smaller enterprises (e.g. builders, corner shops) where costs are often easier to estimate and where likely consumer reactions are given less attention than the need to make an adequate return on the effort involved. The essential point about this form of price determination is that many of the firm’s costs are influenced by external organisations including the suppliers of materials, components and energy and hence pricing will often vary according to changes in the prices of inputs. Only larger organisations, or a group of small businesses operating together, will generally be able to exercise some influence over input prices and even then not all costs will be controllable by the enterprise.
Organisations which take an essentially cost-based approach to pricing will sometimes be influenced by the prices charged by competitors particularly in markets where considerable competition exists and where the products are largely homogeneous and a buyer’s market is evident (e.g. builders during a recession). The competitive approach to pricing, however, is also found in markets where only a few large firms operate and where the need to increase or maintain market share can give rise to virtually identical prices and to fierce non-price competition between the market leaders. In Britain, for instance, a big cross-Channel ferry operator will normally provide the service to customers at the sameprice as its rivals, differentiating its offering in terms of additional benefits (e.g. onboardentertainment) rather than price. Where this is the case, the external demands of the market rather than costs constitute the primary influence on a firm’s decisions, and changes in market conditions (e.g. the actual or potentialentry of new firms; changes in a competitor’s prices; economic recession) will tend to be reflected in price changes.
This idea of market factors influencing pricing decisions also applies to situations where firms fix their prices according to the actual or anticipated reactions of consumersto the price charged for a product known in economics as the price elasticity of demand. In this case, the customer rather than a firm’s competitors is the chief influence on price determination, although the two are often interrelated in that consumers are usually more price sensitive in markets where some choice exists. Differential levels of price sensitivity between consumers of a product normally arise when a market has distinct segments based on factors such as differences in income or age or location. In such cases a firm will often fixits prices according to the segment of the market it is serving, a process known as ‘price discrimination’ and one which is familiar to students claiming concessionary fares on public transport.
While the above discussion has been over simplified and does not take into account factors such as the price of other products in an organisation’s product portfolio (e.g. different models of car), it illustrates quite clearly how even one ofthe so-called controllable variables in a firm’s marketing mix is subject to a range of external influences that are often beyond its ability to control. The same argument applies to the other elements of the marketing function and students could usefully add to their understanding of the internal/external interface by examining how the external environment impinges upon such marketing activities as promotion, distributionor market research.
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