UNIVERSITY OF THE SOUTH PACIFIC

MG309
Assignment 1

STUDENT ID: S11049911

Adleen Chand
QUESTION
Explain the importance of analysing and understanding the firm’s external
environment
The external environment of a firm comprises of the all the factors outside an organization
which have been taken into account in the decision-making process of the firm [ CITATION
Dun72 \l 3081 ]. Government agencies, clients, rivals, vendors, and financial institutions for
example. It is the limitations, concerns, contingencies, and opportunity which affect the
strategic actions of the firm. Thereby, a firm ’s external environment is the sequence of
external factors and circumstances impacting its life cycle and development, and is made up
of economic , technological, competitive, political and socio-cultural environments [ CITATION
Ano20 \l 3081 ]

[ CITATION Ind15 \l 3081 ] cites a research study by Julia Ojeda Gomez as saying, “The external
environment consists of the macro environment and microenvironment, which both affect the
performance of firms”. In this case, the macro environment encompasses the sociocultural,
political, technological, demographic, and economic environment. While the actors' micro-
environment is directly involved with the production and also affects the company, which
consists of suppliers, customers, intermediary agents, government agencies and rivals.

"The business political environment includes political structures and mechanisms in both
international and domestic frameworks. In the globalized world, such processes are strongly
interrelated". For example, the implementation of the internationally negotiated Paris
Agreement and Agenda 2030 affects multinational and local businesses as national
governments mobilize their efforts to achieve the targets. In addition, political and economic
unions may set unique conditions for business behaviour within Member States. For example,
the European Commission has drawn up a circular economy action plan, which involves
statutory recommendations for recycling programs and waste management. Sustainable
production policy instruments include, for example, standards for producer accountability,
incentives for investment in clean technologies, carbon trading and waste management
control, and natural resource use. Other guiding instruments include assigning innovation
funds to sustainability-driven R&D practices of firms or designing acceptable environmental
policies for industrial machinery and plants. In cities, authorities such as municipal councils
and local authorities can influence local infrastructure investment choices and land
management, which affect the access and possibilities of the firms to undertake business in
the region”[ CITATION Sau19 \l 3081 ].

Economic environment identifies human valuations used in the production of products and
services on natural resources, human effort, information, and human-made capital. The
company could operate with centrally controlled economies, such as China, and free-market
economies, such as Europe, based on where the business activities are located. Functioning
with multiple monetary structures generates instability in the economic environment, as
different interest rates, inflation, and currencies relate to each mechanism controlled by
monetary and fiscal policies within each government [ CITATION Sau19 \l 3081 ].

Sociocultural environment allows businesses to anticipate future trends and expectations of

behaviour in the customer community and public approval of business processes. Companies
may examine patterns in their sociocultural environment by explaining a population's
demographics, how the population is behaving, and how the population 's culture is evolving.
Demographic characteristics include data on age and composition of the population, while
social factors include information on educational levels and income disparities in population.
[ CITATION Sau19 \l 3081 ] cites Capon as stating, “Cultural factors hold information on the
norms, values, language, religion, and lifestyles in the society”. Companies interact and work
with people from various cultural backgrounds in the globalized world who operate with in
positions of local communities, consumers, vendors, rivals, or public authorities.

The business technology environment defines the advances in artefacts (such as tools,
products, and their components) and procedures which are creative to help people meet their
needs (such as food, accommodation, health, accessibility, and connectivity). Collectively,
these technologies form engineering structures that are designed to fulfill essential social
functions such as energy production and distribution or water treatment and waste
management.

As technology companies, by partnering and competing with other technology providers,

companies create, build, and produce technology solutions to the needs of the community.
The level of technological innovation sets industry standards, influencing the perceptions on
cost, quality, and environmental performance of the customers and society.
The revolution of digitization is one example of a transition that happens in the technical
environment of organizations and has consequences for sustainability of the environment.

[ CITATION Sau19 \l 3081 ] quote Lock and Seele as saying “ Digitalization is currently
reshaping companies’ information and communication systems and structuring its
stakeholders to three groups: big data generators, collectors, and utilizers and Digitalization
has opened new ways to shape, communicate, monitor, and govern information on
sustainability, which has implications to organizations’ digital surveillance”.

Enhanced metering technology and big data analytics allow business environment to be
improved, evolving external and internal pressures, transparency, and accountability in
corporate world. Digital technology improves analysis of data generated in social networking
sites and financial institutions from the capital, knowledge, and information flows of firms.

The legal environment for business affects firms via legislation, courts' legal rulings and
government-enacted statutes. This provides a framework that restricts and controls the
activities and competitive environment of organizations but can also encourage certain
entrepreneurship development.

Over time, the laws change due to changing social, economic, and political conditions and
influence from various stakeholder groups. Every country has its own legal structure that sets
minimum requirements and regulations for organizations (company laws), obtaining
resources (planning regulations and property laws), conducting business (employment laws,
health and safety laws), and selling consumption outputs (consumer laws). Business
globalization means companies working in various countries with different environmental
standards, different legislative regulations, and criteria [ CITATION Sau19 \l 3081 ]

Clients are vital to any organization and any business success centres around its customers.
The companies could not succeed in the market without customers. Businesses are preparing
plans to attract and retain clients because they are one of the main external factors that
influence business.

Suppliers offer goods and services which are used in the company's final product / service
creation. Since suppliers also regulate the availability and cost of products that the firm
needs, they therefore influence the company's performance.
There will always be rivals providing similar products / services whatever goods or services a
business offers. These rivals play an important role when implementing and creating business
strategies. Therefore, it is necessary to investigate and evaluate how competitive pricing and
product differentiation affect your company.

An external analysis concentrates on the areas of the generic SWOT analysis which are
"Opportunities" and "Threats." The first advantage of external analysis is to correctly classify
what those are. It is then necessary to find out what new challenges and opportunities have
arisen and are likely to arise in the near future. Clearly this knowledge is important in
designing the strategic plan for the company. Considering how current opportunities and risks
are evolving, is also important.

An external analysis guarantees the business remains outward-looking and cantered on

clients, potential clients, and rivals as well as the economic and political conditions under
which the business has to function.

"The external analysis of a company decides a company's potential and existing opportunities
and threats" (Ghani, et al., 2010). "Opportunities and threats are gathered from outside
knowledge, obtained mainly from secondary sources. Secondary sources typically involve
taking a look at industry data, consumer surveys, rivals, environmental (market) data, and
determining the organization's resources, capacities, assets, or processes” [ CITATION Kus18 \l
3081 ].

The external analysis copes with environmental aspects which might create opportunities
(e.g., Glossy box a makeup company has reoriented makeup and beauty products to better
serve males and females) and threats (e.g., Microsoft faces external threat as smartphone
sales are predicted to increase in the future) in relation to competitive solutions as well. "The
business-to-environment relationship will recognize opportunities for and risks to business. It
enables the company to successfully face the challenges. The engagement with the external
environment contributes to the development of new expansion frontiers for the companies "
[ CITATION Kus18 \l 3081 ].

According to [ CITATION Kus18 \l 3081 ] external environmental analysis, "the company is able
to recognize the development and expansion areas of its operations. External Environmental
Analysis makes market issues easier for managers to address. Managers are encouraged to
constantly improve their experience, understanding and skills in order to meet the anticipated
changes in the business environment”.

It also lets businesses evaluate the tactics of rival competitors and develop their own plans
accordingly. In the light of technological and global advances, the market climate helps to
recognise individual strengths and weaknesses [ CITATION Kus18 \l 3081 ].

To conclude an external analysis is necessary for any firm's survival. According to [ CITATION
Kus18 \l 3081 ] "External analysis cannot detect every potential threat and opportunity, but the
likelihood that a company's strategy can neutralize risks and maximize opportunities, can be
greatly increased." "A number of businesses now compete in a global market, not just in the
domestic market. Improvements in technology and increased capacity to collect and process
data need implementation, and more effective and efficient competitive responses. In addition
to the desired product properties consumers increasingly varied, rapid sociological changes
that happen in many nations are affecting jobs. Policies and laws which influence the
government outlined the choice of where and how the business can try to compete.
Companies should be aware and mindful of the effects of this environment's reality, so they
can be a successful actor in the global economy. In strategically competitive companies, the
company's owner / manager may search for trends that will help them understand their
external environment, and this could be unique from what they anticipated. It is critical that
decision-makers have an understanding of the firm's competitive position and accuracy”
[ CITATION Ind15 \l 3081 ]. Therefore an external analysis is extremely important as it gives an
overview of the environment that the firm is in, it identifies opportunities and threats which
will be instrumental in creating a successful strategy to gain a competitive advantage.
BIBLIOGRAPHY

Anon, n.d. Environmental Scanning Practises. [Online]

Available at: https://shodhganga.inflibnet.ac.in/bitstream/10603/167138/8/08_chapter%203.pdf
[Accessed 30 August 2020].

Duncan, R. B., 1972. Characteristics of Organizational Environment and Perceived Environmental

Uncertaintiy. Administrative Science Quarterly, 17(3).

Ghani, k. D. A., Nayan, S., Ghazali, S. M. & Shafie, L., 2010. Critical Internal and External Factors
that affect Firms Strategic Planning. International Research Journal of Finance and Economics,
Volume 50, pp. 50-58.

Hanson, D., Hitt, M. A., Ireland, R. D. & Hoskisson, R. E., 2017. Strategic Management:
Compettiveness and Globalization. 6th ed. s.l.:Cengage Learning Australia Pty Limited.

Indris, S. & Primiana, I., 2015. Internal and External Environment Analysis on the Peformance of
Small and Medium Industries in Indonesia. International Journal of Scientific & Technology
Research, 4(4).

Kushwah, R. K., 2018. A Study of Importance forAnalyzing and understanding the firms external
environment in Delhi. Journal of Advances and Scholarly Researches in Allied Education, 14(2).

Saukkonen, N. & Kirjavainen, J., 2019. Business Environment:Emerging External and Internal
Pressures For Sustainable Production. [Online]
Available at: https://link.springer.com/content/pdf/10.1007%2F978-3-319-71062-4_1-1.pdf
[Accessed 7 September 2020].