Examining Outside Influences: Exploring How External Elements Affect Business Prosperity
The world outside your business is a constantly changing landscape that massively impacts your operations and decision-making. It's often referred to as the external business environment, and understanding it is crucial for achieving long-term success. Here's why:
Smart choice-making and strategic planning: A good grasp of the external environment helps you to be knowledgeable about industry trends, competitor strategies, and possible opportunities or threats. This knowledge gives you the power to make informed decisions about resource allocation, entering markets, and overall business strategy.
Let's say a food business spots a growing trend in consumers demanding organic products. Understanding this information from external environment analysis empowers them to develop a strategy to enhance their organic product offerings and cater to this rising market demand.
Proactive risk management: The external environment is in a state of continuous evolution, and unforeseen problems can emerge. Identifying these potential risks allows you to create contingency plans and lessen the impact they may have on your business.
A company facing the likelihood of new government regulations may, through external environment analysis, prepare proactively for compliance training for its employees and update its business practices to ensure compliance. This proactive approach reduces the risk of legal complications or operational disruptions.
Discovering fresh opportunities: The outside world also presents plenty of opportunities for growth. By staying informed about developing market trends, technological advancements, and changing customer preferences, you can identify new business opportunities and design innovative products or services to exploit them.
A retailer might identify a growing trend in online shopping, offering them a chance to develop a strong online presence and expand their customer base beyond their physical stores.
Important aspects to consider when examining the external environment
Relevance: Not every external factor is equally significant for your business. Prioritize those that greatly impact your industry, target market, and day-to-day operations.
For instance, a small bakery might pay less attention to global economic fluctuations than to shifts in local consumer preferences for baked goods.
Time horizon: Consider both short-term and long-term trends when evaluating the external environment. Grasping short-term trends lets you to make tactical alterations, while longer-term trends help guide your business strategy.
A company crafting a new mobile app might consider the short-term adoption rate of new technologies to shape its initial marketing plans and longer-term technology trends to inform its app's development roadmap.
Tools for analyzing the external environment
Analyzing the external environment may seem difficult, but there are handy tools to help you understand the factors that matter most. Here are some popular ones:
PESTLE Analysis
This widely-used framework categorizes external factors into six primary areas:
- Political: government policies, regulations, and political stability that impact your business operations.
- Economic: economic factors like inflation rates, interest rates, and economic growth that affect consumer spending power and production costs.
- Social: social trends, demographics, and cultural shifts that influence consumer preferences and societal values.
- Technological: technological advancements that disrupt industries, create new opportunities, and change customer expectations.
- Environmental: environmental regulations, resource availability, and climate change that affect a company's operations and sustainability practices.
- Legal: legal considerations like labor laws, intellectual property rights, and consumer protection regulations that influence business practices and compliance requirements.
By looking at these six facets of the external environment, businesses gain a complete understanding of potential opportunities and hurdles they might face.
SWOT Analysis (opportunities and threats)
Although SWOT Analysis considers both internal and external factors, the Opportunities and Threats sections focus specifically on the external environment.
Opportunities represent favorable external trends that a company could take advantage of to gain a competitive edge. Threats, meanwhile, are external factors that could potentially harm their business.
A company boasting good brand reputation might identify an opportunity to expand in a new market with rising demand for its products. However, the emergence of strong competitors in that new market could pose a threat to its success.
Micro vs. Macro Environment Breakdown
The external environment breaks down into two primary levels:
- Microenvironment (industry environment or competitive environment): This level focuses on factors that directly affect the company's ability to serve customers and compete within its industry. Examples include customers, suppliers, competitors, creditors, and industry regulations.
- Macroenvironment: This broader level contains all external factors that could influence a business, regardless of industry. The six PESTLE factors mentioned earlier (political, economic, social, technological, environmental, legal) fall under this category.
Categories of the external environment
The external environment isn't a solid structure. It's a complex web of factors that can be broken down in various ways to give a clearer picture. Here, we'll cover a three-level classification system to better grasp its complex nature.
This classification system divides the external environment into three distinct layers, each with its own unique factors:
Natural physical environment
This outermost layer represents the fundamental physical aspects that shape human activity and resource availability. Key factors in this layer include:
- Resources: availability of raw materials, energy sources, and natural resources that impact industries that rely on them.
- Climate: weather patterns, natural disasters, climate change that influence business operations, production costs, and customer behavior.
- Wildlife: although not directly relevant for all businesses, wildlife can impact those in certain sectors, including tourism, agriculture, and conservation.
Societal environment
This middle layer focuses on social, cultural, and legal frameworks within which businesses operate. Key aspects in this layer include:
- Political: government policies, regulations, and political stability that impact a business.
- Economic: economic factors like inflation rates, interest rates, and overall economic growth that affect consumer spending power, production costs, and investment decisions.
- Social: social trends, demographics, and cultural shifts that influence consumer preferences, societal values, and ethical considerations for businesses.
- Technological: technological advancements that disrupt industries, create new opportunities, and change customer expectations.
- Legal: legal considerations like labor laws, intellectual property rights, and consumer protection regulations that influence a business's practices and compliance requirements.
Task environment (industry environment or competitive environment)
This innermost layer represents the immediate environment surrounding a company and directly impacts its ability to compete. Key factors in this layer include:
- Customers: understanding customer needs, preferences, and buying behavior is crucial for a company's success.
- Suppliers: the relationships and reliability of suppliers can significantly impact a company's production costs, product quality, and overall supply chain efficiency.
- Competitors: understanding competitor strategies, strengths, and weaknesses is vital for gaining a competitive edge.
- Creditors: financial institutions and lenders can affect a company's access to capital and overall financial health.
- To make strategic decisions and allocate resources effectively, it's essential for a business to stay abreast of climate-change trends, as they can have a significant impact on production costs and customer behavior.
- Analyzing data from the external business environment can help a company identify potential opportunities, such as the adoption of environmental-science practices that resonate with eco-conscious consumers.
- By staying informed about industry trends and technological advancements, a business can create innovative financial models and better align itself with current business practices in data-and-cloud-computing and technology.
- A retail enterprise could bolster its education-and-self-development initiatives by offering courses on climate-change mitigation and sustainable practices that cater to consumers' growing environmental awareness.
- In the industry environment, understanding regional demographics and societal values can aid a business in tailoring its product offerings to meet the specific needs and preferences of its target market.
