Businesses and the External Environment
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Definition: The external environment of a business refers to factors outside the business that influence its operations and success. It encompasses political, economic, demographic, technological, social, and legal factors, collectively referred to as the PESTLE analysis.
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Political Factors: Involve changes in government policy, tax laws, trade tariffs etc. Businesses must adapt to operate effectively under new policies or political climates, making political awareness essential.
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Economic Factors: Refer to conditions of the economic system within which the business operates. It includes interest rates, inflation, unemployment rates and GDP growth. If the economy is healthy, people have more money to spend and vice versa.
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Social Factors: Look into societal trends and changes that can affect the demand for business products or services. These can include changes in lifestyle, consumer attitudes and behaviours, cultural shifts, population growth rate, age distribution etc.
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Technological Factors: Reflect advances in technology that may affect the operations of a business, either by changing the process of production or through the emergence of new competitors. It includes R&D activity, technology incentives and the rate of technological change.
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Legal Factors: Include laws and regulations that businesses need to follow. They can affect a business’s operations, its costs, and the demand for its product or service. Examples include labour law, environmental regulations, tax law, and company law.
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Micro Environment: This includes competitors, customers, suppliers, and other business influencers. Understanding these components helps businesses thrive in the state of competition and make strategic decisions.
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Macro Environment: Macro-environmental factors involve larger societal forces that impact the micro-environment. It includes factors like inflation rates, changes in foreign exchange rates, and other market dynamics.
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SWOT Analysis: As part of evaluating the external environment, a business may conduct a SWOT analysis which details its Strengths, Weaknesses, Opportunities, and Threats. Opportunities and Threats are components that evaluate the external environment.
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PESTLE Analysis: The external environment can be broadly evaluated using PESTLE Analysis which stands for Political, Economic, Socio-Cultural, Technological, Legal and Environmental factors.
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Impact on Business Strategy: Businesses must adapt their strategies in response to the changes in the external environment. This involves product development, diversification, target market changes, and more. It allows the business to maintain or improve its competitive position.
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The impact of the external environment is not static. The external factors are dynamic and keep changing. Thus, a periodical systematic analysis for these factors and adapting to these changes is vital for the survival and growth of the business.
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Environmental audits: These can help businesses identify and assess external factors in their environment. They provide an in-depth understanding of those factors to provide a strong base for strategic planning.