The external environment of a business, also known as the macro environment, includes all factors outside the reach of the business, that can impact the operations of the business. External factors influence the choices a business makes, as they determine opportunities and risks. Let's take a look at these different factors in more detail. Show
External business environmentAll businesses are impacted by their external environment. Sometimes a business has to act upon and react to what happens outside of the scope of its operations. These external influences are known as external factors. Multiple different factors can influence a business's external environment. These factors are often unpredictable and can change suddenly. The external environment plays a huge role in the types of strategies and actions a business decides to implement. The external environment can affect competitiveness, budgeting, decision making, and the marketing mix. The main external factor that influences business most is competition. Competition is the degree to which businesses compete with one another in the market. Most businesses, especially when operating in a popular industry, will have to face intense competition. The amount and type of competition mostly depend on the industry a business operates in. Although competition is one of the most significant factors, several other external aspects affect the strategies and actions taken by a business. External environmental factorsFour main components make up the external environment of businesses. These are the main external factors you have to consider when operating a business. Economic factorsSeveral economic factors can influence the business environment. One of them is market conditions. Size and growth rates are good indicators of market conditions. Market conditions are made up of many different economic elements that affect the attractiveness of a market. For instance, good market conditions can be described by economic growth and increasing market demand. Economic growth measures the value of output in a country's economy. One way you can measure economic growth is through Gross Domestic Product (GDP). This is the total value of all finished goods and services produced in a country's economy during a given period. Another factor is market demand, which measures how much of a good or service consumers are willing and able to pay for. Demographic factorsDemographic factors are related to the population. For instance, an increase in the size of a population will most likely lead to an increase in demand for goods and services, as there are more potential consumers. Changes in the age of a population will also have significant influences on businesses. An ageing population (more old people) will have different demands than a younger population. Older consumers tend to want and need different goods and services than young people. Environmental and social factorsSociety increasingly expects higher standards of environmental and sustainability-related awareness from businesses. Unfortunately, a lot of businesses contribute significantly to the creation of environmental damage. Some governments have stepped up in this regard, passing certain legislation in order to protect the environment. Many governments impose quotas on the amount of harmful substances firms can emit within a timeframe, and fine businesses that over-pollute or ignore the legislation. These legislations are there to force firms to take into account the social costs (the cost to society and the environment) of production. External environment analysisA useful tool for analysing the external environment of an organisation is 'PESTLE'. PESTLE analysis takes a look at six different external factors that could have an impact on your business and rates the intensity and importance of each. PESTLE stands for political, economic, social, technological, legal, and environmental/ethical factors. PESTLE factors. StudySmarter PoliticalThe 'P' in PESTLE. Political factors play a huge role for businesses operating in certain industries. Political factors include:
EconomicThe first 'E' in PESTLE. As outlined earlier, economic and market factors can significantly impact business functions. Some economic factors to consider include:
SocialThe 'S' in PESTLE. These socio-cultural factors include:
TechnologicalThe 'T' in PESTLE. Technology, especially in today's society, plays a huge role in business development and decisions. With technology developing rapidly, here are a few factors to keep in mind when considering the external environment of the business:
LegalThe 'L' in PESTLE stands for legal considerations regarding the external environment of a business. These include:
Environmental/ethicalFinally, the second 'E' stands for environmental and ethical factors. These include:
External Environment - Key takeaways
Why is it important for any organization to study and understand external environment?Analyzing your company's external environment is a critical step in preparing a strategic plan. This is a complex task because it involves collecting a variety of data to get an accurate picture of the situation. Based on this analysis, the company can then make sound decisions to further its growth.
Why is it important for a firm to study and understand the external environment quizlet?Why is it important for a firm to study and understand the external environment? Affects the competition action and responses firms take to outperform competitors and earn above average returns.
Why is it important for an enterprise to study and understand its internal and external environment?Once they know about both positive and negative effects within and outside the company, they can produce suitable strategies to handle any predicted situation. Therefore, examining internal and external factors is considered the most important task for an enterprise before launch any strategic marketing plan.
Why should an organization be interested in its external environment?THE external environment plays a critical role in shaping the future of entire industries and those of individual businesses. To keep the business ahead of the competition, managers must continually adjust their strategies to reflect the environment in which their businesses operate.
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