In this course, we've been trying to solve a problem; How do we design an organization so that it can be effective and thrive. So far we've been focused mostly internally, on the internal structure and inner workings of the organization but there's another important consideration when we're designing an organization. We need to take into account what's happening outside the organization with customers, suppliers, governments, broad economic conditions, changing social and cultural conditions and much more. As we consider these external factors, we're going to be taking an open system view of organizations rather than a rational or natural systems' view. You'll see that this introduces an important new dimension to how we think about designing effective organizations. Now remember that an open system perspective says that firms have to adapt to their external environment in order to survive. So as a starting point, let's talk about what we mean when we talk about the external environment. Simply put, the external environment is everything that exists outside of the organization that has the potential to influence the focal firm. Now that's a pretty broad idea, so let's see if we can break it down just a little bit. Here's one way to break down this idea of the external environment. You can think about some aspects of the external environment that are more likely to have a direct effect on the functioning of the organization. This is often referred to as the 'Task Environment'. This includes things like the direct competitors in your industry, your customers and your suppliers, the labor market, and other key stakeholders. Notice that you have to interact with these external parties on a regular basis and effectively manage these direct relationships if you're going to survive. Now there are other parts of the external environment that may have less of a direct influence on the organization, but they are still important. We usually call these factors the general environment. These would include things like political and legal factors. So for example, what level of government regulation exists for your company, is there an upcoming election that could have implications for your firm, what kind of local, state and national laws are being passed that could influence your firm. The general environment also consists of broader economic conditions. So for example, you probably care about the economy in the community and nations where your organization resides. Another general environment factor would be socio-cultural factors. So are there changes in demographics among key constituencies like an aging population or are there other changes in broader tastes and preferences that you need to be aware of. Finally, you also need to remain aware of changes in technology that can impact your firm. You may have heard of something called PEST Analysis, which is focused on these general environmental factors. So political factors, economic factors, socio-cultural and technological factors, and PEST gives a nice easy way to remember some of the critical parts of the external environment that managers need to think about. Think for a moment about your own organization; what are the key stakeholders that would make up the task environment, are there broader environmental factors that your organization has to recognize and adapt to. Now, why do we care about the external environment? Well ultimately, it's a matter of survival for firms. Firms need to be able to gather information about the environment and they need to bring in valuable resources from the environment. Simply put, they have to sell their products and services to outside stakeholders, customers, so they can pay their employees by raw materials and generate returns for shareholders.