Rosario, Marissa Q.
Strategic Management
ECO – 31 Dr. Danilo F. Marcelo Jr.
Analysis of External Environment
The analysis of an Organization's External Factors is part of that process, where you can learn or
understand the uncertainty in order to become competitive. It is intended to raise awareness of
the opportunity or treatment of the company. It will have significant benefits for a company if the
analysis and strategy are properly carried out. Conversely, any measure taken by the company
will not achieve a satisfactory result if it has no idea of the threat to its environment from outside.
External environment refers to macro-environmental forces outside the business and does not
affect its operations or performance. Analysis of factors such as politics, economy, customers,
suppliers, and societal conditions. It gives you an indication of what's happening to your company
in the future. It is difficult for managers to gain a competitive edge, lead their competitors, and be
the first in the market because they cannot control the external environment. Therefore,
companies that continuously analyze the environment have a better chance to compete than the
others.
The external environment is composed of operating and remote environments
General/Remote/Macro Environment
The environment is composed of factors that have a wide and adverse impact on the sectors and
enterprises competing with each other. In order to find out and assess opportunities and threats
facing the company, an overall environment shall be inspected, analyzed, forecasted and
assessed.
Operating/Task Environment
A company's workplace environment is made up of factors that are directly linked to its competitive
position. This is a group made up of different stakeholders, who are both directly or indirectly
interested in the performance of the business.
Techniques/Tools of External Environment Analysis
The main techniques used to analyze the external environment are mentioned below.
1. PESTLE Analysis - a concept of political, economic, sociocultural, technological, legal,
environmental, and global factors. The PESTLE analysis is based on an examination of all the
above factors in relation to the environment. The company is not in a position to control these
factors. They are examined for trends in the environment as well as potential opportunities and
threats.
2. Scenario Planning - for environmental analysis, scenario planning shall be used. For
businesses, it is an efficient method of thinking about the future. It is made by studying the
possible adverse effects of a specific business.
3. Industry and Competitive Analysis - the sector is a group of companies that produce
products that are close substitutes. Porter's five Forces, which represent threats to new entrants
and product substitutes, bargaining power of suppliers and buyers as well as rivalry with
competitors are taken into account in terms of the industry environment.
Segments that affect the operation of the firm
The general environment of the organization is usually the starting point for assessing the external
environment of the organization. The overall environment is shaped by the dimensions of a
broader society which has an impact on industry as well as its firms. The six sectoral groups are
politics, economy, society, technology, law, and environment.
1. Political Factors - deal with the extent to which government and state policies may have an
impact on organizations or specific sectors. Political policies and stability, as well as economic,
fiscal, and taxation policies, are part of this.
2. Social Factors - which focus on the environment and are aware of emerging trends. It will help
the businessperson, in a social setting, to understand consumers'
3. Technological Factors - which take into account the pace with which technology changes and
developments can influence a market or industry.
4. Legal Factors - an organization must have a clear understanding of what is legal and
permissible. They should also be aware of the changes in law and how they may affect their
businesses.
5. Environmental Factors - have an effect on the environment and its impact on environmental
issues. This element is becoming increasingly important in the way organizations are required to
conduct their business, given the increasing importance of corporate social responsibility for
sustainability.
These factors are important to provide early warning of potential threats to a company. And it
encourages firms to take a look at the external environment.
Forces that affect the Firm's competitiveness
The five-force framework can be used to understand the competitive forces in an industry and
how economic value is divided between its participants. In a famous 1979 Harvard Business
Review article by Michael Porter, it was introduced. Porter had initiated a revolution in the field of
strategic thinking, and his insights continue to have an effect on business practices and academic
thought today. In order to assess the desirability of the sector, anticipate how trends will affect
industry rivalry, identify which sectors to compete in, and plan how to position themselves for
success, a Five Forces analysis can help companies.
1. Bargaining Power of Buyers - the purchasing power of buyers is highest when they are large
relative to their competitors serving them, products are not differentiated and represent a
significant cost to the buyer, and there are few switching costs to shift business from one
competitor to another.
2. Bargaining Power of Suppliers - strong suppliers may use their negotiating power to take up
higher prices or seek more favorable terms from competitors, which would reduce profitability in
the sector.
3. Threat of New Entrants - the threat of new entrants into the business could force current
players to reduce prices and increase their spending in order to retain customers.
4. Threat of Substitute Products or Services - the threat of substitution is high if it offers an
attractive price performance compared to the product of the industry or if the cost of switching to
the substitute is low for the buyer.
5. Rivalry Among Existing Competitors - in challenging large competitors, firms can boost their
market shares by focusing on quality, lower prices, differentiation, and new markets.
REFERENCES
Oxford College of Marketing. (n.d.) What is a Pestel Analysis?
[Link]
Harvard Business School. (n.d.) The Five Forces. [Link]
strategy/Pages/[Link]
Sujan (2022). What is External Environment Analysis? Definition, Tools, & Importance.
[Link]
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