The External Environment

Global Environment

Ecological Environment

Global Environment

Technological Legal
Competitors

Labour Unions
Strategy Consumers Production Marketing Financial

Inputs
Production Factors Suppliers

Output Goods /Services

Human Resources

Micro Environment Political Market Environment Global Environment Socio-cultural

Economic Macro Environment Global Environment

External Environment Factors

A large number of factors which are outside the organizations boundaries influence a firms choice of direction and action, its organizational structure and internal processes and ultimately its performance

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External Factors
These factors which constitute the external environment can be divided into four subcategories: 1)factors in the global or international environment 2)factors in the macro environment

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External Factors
3)Factors in the industry environment (also known as the market environment) 4)Factors in the operating environment (also known as the micro environment)

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External Environment
The management task cannot be carried out effectively and efficiently without taking these external factors into consideration

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Global or International Environment

Profit seeking organizations that operate within a country while drawing resources from or selling products to another country can be affected both on the national and international level. Sanctions and international boycotts can be a major negative influence on a company doing business across its borders. Even local businesses for that matter. Other global factors such as rand/dollar exchanges rates can also negatively affect a business
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Global or International Environment

Local organizations must keep up to date with international data on inflation, exchange rates, interest rates, recession, shortages of natural resources (such as oil as result of eg. War in Iraq), international politics

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Global or International Environment

Organizations involved in international trade quickly realizes that success or failure depends on knowledge of legislation, customs processes, ethics, economic systems and on the management practices which are followed. The manager must be conversant with the nature of international management and must be trained not only to spot threats but also how to convert these threats to opportunities.
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Macro Environment
The macro environment includes all external influences that have a bearing on the business but do not fall within its direct sphere of influence. Remaining abreast of environmental changes in order to predict changes is important.

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Macro Environment
The macro environment is the larger environment within which businesses exists. This environment presents organizations with opportunities, threats and constraints and subsequently environmental scanning needs to be performed in order to establish trends in this environment.
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Macro Environment
There is a framework to help organizations assess its broad environment- the PESTLE analysis. This is an examination of the Political, Economic, Socio-cultural, Technological, Legal, Ecological external business environment. Lets now look at these factors in more detail and see how they affect or influence a business.

Political
The direction and stability of political factors are a major consideration for managers on formulating company strategy. Political factors define the legal and regulatory parameters within which firms must operate. Political constraints are placed on firms through fair trade decisions, anti-trust laws, tax programs, minimum wage legislation, pollution and pricing policies and tariffs and social welfare policies aimed at protecting the consumer, employees, the general public and the environment. Lecture Notes 4

Political
Since such laws and regulations are generally restrictive, they tend to reduce the profit margin of firms. However, some political actions are there to protect firms such as patent laws, government subsidies, research grants, and promotion to fair trade laws. Thus political can either benefit or limit the firms they influence
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Political
Examples of political factors in SA. Appointment of JZ as the president of the ANC, the Tiger Oats and bread debacle, ESKOM issues etc.

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Political
Political factors also influence the type of economic system adopted in a country. Management must make sure that they are aware of the governments policies on economic activities and system. The various economic systems are discussed below.

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Free- Market System

System in which products or services demanded by customer are provided by private organizations seeking profit [1]. It functions on the assumption that: members of a community may possess asset and earn profits from them The allocation of resources is affected by the free market Free choice as to which products, services, places of residence and careers Minimum interference from the state
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Command economy
Communism State owns and controls the communitys resources Individual owns no property Communal ownership Decisions as to what to produce and by whom and for whom rests with the central government
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Command economy
Choice of products therefore limited to what the state offers State decides what the needs of the community are State decides where the goods will be obtained and in how much quantities Consumer has no choice and profit motive is absent
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Socialism
Compromise between pure market and pure command economy State owns and controls the principal industries and resources such as manufacture of steel, communication, transportation, health, services and energy Less strategic industries are left for individual ownership The rationale is that basic & strategic resources should belong to the community
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Socialism
For the rest such as trade and construction and the production of materials and services of lesser strategic importance are left to the private initiative For the rest businesses operate in a free market economy

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State interventions
The fact that the state intervenes does not mean that the state is trying to move in the direction of a command economy Rather, regulation is important in leveling the playing fields

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Need satisfying institutions of the free market

By business organizations we mean private business Government organizations such as Eskom, Telkom etc, Chapter level institutions Non governmental institutions NGOs
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Economics
Economic factors concern the nature and direction of the economy in which the firm operates. It forms the central focus for change in the macro environment. It influences all others environment and is also influenced by them.

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Economics
On both the national and international level, managers must consider availability of credit, level of disposable income, buying power of the people, prime interest rates, inflation, recession and the business cycle. These economic factors influence the demand for goods and services by compelling consumers to re-assess their priorities in terms of what to buy. Each significant economic change requires appropriate reaction by the business.
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Economics
Inflation is described as the continual rise in the general price level. There are two forms of inflation namely demand inflation and cost push inflation. Demand inflation occurs when the cost of goods and services is greater than the supply resulting in higher prices. A good example is the demand for electricity in SA. Cost push inflation occurs when production costs of goods continually to increase resulting in higher input costs which is reflected in higher selling prices. In SA, inflation currently stands at 9.4 % whereas in Zimbwabwe it is closer to 150 000%.
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Social Issues
The social factors that affect a firm involve the beliefs, values, attitudes, opinions, and lifestyles of persons in the firms external environment as developed from cultural, ecological, demographic, religious, educational and ethnic conditioning. As social attitude change so too does the demand for various products and services.
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Social Issues
Example of recent socio-cultural issues are the impact of HIV AIDS, Increase in the employment of women, distribution of income, level of education, different languages, urbanization, population growth etc.

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Technological
To avoid obsolescence and promote innovation, a firm must be aware of technological changes that might influence its industry. The firm needs to perform technological forecasting, which is the quasi-science of attempting to foresee advancements and estimates their impact on the organizations operations. Examples the rise of the Lecture Notes 4 internet, etc

Technological
Many of the recent changes in business are the result of technological advancement and innovation. Research and development provide the source for technological innovation and new products, processes, methods and approach to management results from this.
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Technological
Technological innovation has had an impact on: Trading: Developments in electronic communication as manifested by the internet have changed the face of business. This has created new business opportunities or capabilities such as e-commerce, e-trading, emarket, e-supply and many others.
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Technological
Labor saving machinery and equipment: these have been developed as result of technological innovation. This has lead to new improved businesses, new products for customers and improved customer satisfaction.

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Technological
Administrative systems and equipment: New technology in the form of electronics and automated systems has introduced a new area of competition among organizations. Especially in the area of banking, retailing, tourism and recreation. Organizations must keep abreast of new developments regarding credit cards
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Technological
Increased productivity: Increase in productivity has resulted due to new machinery being used and automated business processes etc.

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Legal
Legal issues include: Legislation about trade practices and competition, Environmental protection legislation, Employment laws such as Employment Equity laws and various other laws which are there to protect businesses, the environment and the consumers.
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Ecological
The term ecology refers to the relationships among human beings and other living things and the air, soil, and water that support them. Issues such as: Global warming and climate change, Animal welfare issues, Waste issues, unnecessary packaging, Pollution (land, water, and air) are important issues and warrant closer Lecture Notes 4 scrutiny.

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Ecological
Government has developed many environmental regulations in order to protect the physical environment from being contaminated. Businesses are now being held responsible for eliminating the toxic by products of their manufacturing processes and for cleaning up the environmental damage caused. In SA we have the green scorpions who enforce these environmental legislation.

Ecological
Environmental legislation impacts corporate strategies world wide. It is therefore, important that companies draft and develop environmental policies. Eco-efficiency is now a new buzz word to describe organizations that produce more useful goods and services whilst continuously reducing resource consumption and pollution.
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Ecological
Customers are now demanding cleaner products and employees now prefer to work for environmentally conscious firms. Furthermore, environmental regulations are increasing. In addition government provides incentives for environmental responsible companies. It is therefore in the best interest of the business organization to adopt an environmental policy.

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Market Environment
The ability of the business to be competitive is determined by the interaction between the business and its immediate environment, the market environment. This forms the industry in which the business is in. It consists of all the forces and influences inherent in a capitalist or free market economy. It is the responsibility of the manager not only to see the needs of the consumer within the market environment, but also to identify possible opportunities and threats and to convert possible threats to opportunities and to develop strategies to counteract competition
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Market Environment
The following components within the market environment must be analyzed carefully by management: Interests groups: these are institutions and groups which have an interest in the existence and future of the business. They exert influence by using the media to their advantage. Consumers: consumers have a major effect on the organizations performance through purchasing products and services. The changing needs of consumers may offer opportunities as well as threats.
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Market Environment
Competition: Businesses compete for customers. Business organizations must develop strategies which ensures that they get an advantage over their competitors. The formulation of this strategies strategy requires a sound competitive analysis.

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Market Environment
Labor force: organizations must concern themselves with matters of labor unions. Employees of the organization has a direct effect on its performance Suppliers: Suppliers affect the organizations effectiveness. If goods / raw materials are not supplied on time business is affected.
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Market Environment
Strategic alliance: This refers to two or more companies that work together in joint ventures. They help to share with each other whatever expertise they lack

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Market Environment
Management must look outside the organization and be aware of trends in the market environment in order to seize opportunities and to counteract threats It has already been mentioned that the market environment consists of competitors. Competitors pose a threat to the business.
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Market Environment
Michael Porters five forces model can be used to analyze an industrys profitability and attractiveness. According to the model. In the centre is the competitive battleground, where rivals compete and competitive strategies are developed. Organizations seek to understand the nature of their competitive environment.
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Threat of new entrants

Bargaining power of suppliers

Industry Competitorsrivalry among existing firms

Bargaining power of buyers

Threat of substitute products or services Michael Porters Five Forces Model

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Market Environment
Additionally, organizations will be in a stronger position if they understand the interplay of the forces and can develop defenses against the threat they pose. New entrants may want to enter the market if it looks attractive and if organizations in that market are making a killing and if the barriers to entry are low.
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Market Environment
Remember if an organization is making a huge profit, other organizations see this as a cue to enter that same market. They then try to capture a share of the market.

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Market Environment
Globalization and deregulation both give new entrants this opportunity to enter the market.

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Threat of new entrants

But there are barriers to entry that organizations build, including the following:
Economies of scale: if substantial investment is necessary before a new entrant can compete, then this may be a deterrent.

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Threat of new entrants

Product differentiation: if existing products and services are seen to have strong identities that are supported by high expenditure or branding, then new entrants may be deterred from entry. Substantial capital investment by a new entrant

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Threat of new entrants

Access to distribution channels: existing distribution channels may be committed to existing suppliers, thus requiring new entrants to find new and different distribution channels Technologies and the use of patented processes.

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Bargaining power of suppliers

Supplier power limits the opportunity for cost reduction when: there is a concentration of suppliers and when the supplying businesses are bigger than the many customers they supply the costs of switching from one supplier to another are high because of supply logistics or the inability of other suppliers to deliver; the supplier brand is powerful customers are fragmented
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Bargaining power of customers

Bargaining power of buyers is high when: there is a small concentration of buyers and many small organizations in the supplying industry, for example in the supply of food to supermarkets Alternative sources of supply are available and easy to find; the costs of the product or service is high, thus encouraging the buyer to search out alternatives; Switching costs are low.
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Threat of substitute products

The threat from substitute products is high when: Product substitution from new technologies is more convenient, eg. DVDs for videos The need for the product is replaced by a different need; We can decide to do without it very easily
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Competitive rivalry
All of the above mentioned forces impact on the competitive battleground in some way. On the battleground itself, there is competitive rivalry. This is high when: there are many competing firms; buyers can switch easy from one firm to another; the market is growing slowly;
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Competitive rivalry
the industry has high fixed costs, and responding to price pressure is difficult; products are not well differentiated, and so there is little brand loyalty; the costs of leaving the industry are high.

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Conclusion
The PESTLE and Porters framework are handy tools to use if we want to analyze the business organizations external environment. It gives much useful data about the attractiveness of the business and the external conditions that the business faces.

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References
[1] David Needle, Business in context: An introduction to business and its environment , Chapman and Hall, 2nd Edition. [2] Cronje, et al, Introduction to business management, Oxford University Press, 5th Edition.

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References
[3] Pearce and Robinson, Strategic Management: Formulation, Implementation and Control, McGraw Hill, 8th Edition. [4] Debra Paul and Donald Yates, Business Analysis, BCS
Some of the slides are extracts from the above references

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