WHAT IS BUSINESS?

Business is the activity of a person who is producing goods or offering services

with the intent to sell them to profit. External forces are the forces resulting from
the interaction between human and its environment.
External forces can be divided into five broad categories:
1. ECONOMIC FORCES
2. SOCIAL, CULTURAL, DEMOGRAPHIC, AND NATURAL ENVIRONMENT FORCES
3. POLITICAL, GOVERNMENTAL, AND LEGAL FORCES
4. TECHNOLOGICAL FORCES
5. COMPETITIVE FORCES

1. ECONOMIC FORCES
Factors that are at the scenario where the organization performs, and affect either
directly or indirectly the firm.
2. SOCIAL FORCES
are the current social factors that are visible in the economy. It can be particular
beliefs, ideologies in a specific direction.
CULTURAL FORCES
are the factors that decide what kind of culture like the traditions followed by
people, their overall behavior and likings, thought patterns, lifestyles.
DEMOGRAPHIC FORCES are the ones that define things like population structure,
the age of the people, gender ratio, occupational structure, family size, marital
status etc.
NATURAL ENVIRONMENT FORCES the state of natural resources in an economy,
the current condition of environment etc.
3. POLITICAL FORCES
Political factors that affect businesses include taxation, employment laws, and
political stability. They can impact a business positively or negatively by
influencing how companies operate. One of the negative impacts is the
introduction of risk.
GOVERNMENTAL FORCES
Governments influence the environment in which businesses operate in many
ways, including taxation, tariffs, trade agreements, labor regulations, and
environmental regulations.
LEGAL FORCES
Legal factors in a business environment are defined as law-related issues and
proceedings that the owner of a business must consider in order to run the
business seamlessly. Laws that affect businesses include federal regulations, state
laws, and customs imposed norms
4. TECHNOLOGICAL FORCES increased leisure time, improved communication and
better management information systems, while some negatives might include
increased unemployment and information abuse.
5. COMPETITIVE FORCES the factors and variables that threaten a company's
profitability and prevent its growth.

What Are Porter's Five Forces?

Porter's Five Forces is a model that identifies and analyzes five competitive forces
that shape every industry and
helps determine an industry's
weaknesses and strengths. The Five
Forces model is named after Harvard
Business School professor, Michael E.
Porter.
Porter's 5 forces are:
1. Rivalry among competitors
The first of the Five Forces refers to the number of competitors and their ability
to undercut a company.
 Number of competitors
 Quality differences
 Other differences
 Switching costs
 Customer loyalty
 Costs of leaving market, etc.

2. Power of Suppliers
The next factor in the Porter model addresses how easily suppliers can drive up
the cost of inputs. It is affected by the number of suppliers of key inputs of a
good or service, how unique these inputs are, and how much it would cost a
company to switch to another supplier.
 Number of suppliers
 Size of suppliers
 Uniqueness of service
 Ability to substitute
 Cost of changing, etc.

3. Power of Customers
The ability that customers have to drive prices lower or their level of power is one
of the Five Forces. It is affected by how many buyers or customers a company has,
how significant each customer is, and how much it would cost a company to find
new customers or markets for its output.
 Number of customers
 Size of each order
 Differences between competitors
 Price sensitivity
 Ability to substitute
 Cost of changing, etc.

4. Potential of New Entrants Into an Industry A company's power is also affected

by the force of new entrants into its market. The less time and money it costs
for a competitor to enter a company's market and be an effective competitor,
the more an established company's position could be significantly weakened.

 Time and cost of entry

 Specialist knowledge
 Economies of scale
 Cost advantages
 Technology protection
 Barriers to entry

5. Threat of Substitutes The last of the Five Forces focuses on substitutes.

Substitute goods or services that can be used in place of a company's products
or services pose a threat
 Substitute performance
 Cost of change, etc.

External Factor Evaluation (EFE) Matrix is a strategic analysis tool used to

evaluate firm’s external environment and to reveal its strengths as well as
weaknesses.
EXTERNAL FACTOR ANALYSIS

 Key External Factors

When using the EFE matrix we identify the key external opportunities and threats
that are affecting or might affect a company. By analysing the external environment
with the tools like PESTLE analysis, Porter’s Five Forces or Profile Matrix, the key
external factors can be identified. The general rule is to identify as many key external
and internal factors as possible.

 Weights

Each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0
(high importance). The number indicates how important the factor is if a company
wants to succeed in an industry. If there were no weights assigned, all the factors
would be equally important, which is an impossible scenario in the real world. The
sum of all the weights must equal 1.0. Separate factors should not be given too
much emphasis (assigning a weight of 0.30 or more) because the success in an
industry is rarely determined by one or few factors.

 Ratings
The ratings in external matrix refer to how effectively company’s current strategy
responds to the opportunities and threats. The numbers range from 4 to 1, where 4
means a superior response, 3 – above average response, 2 – average response and 1
– poor response. Ratings, as well as weights, are assigned subjectively to each factor.
In our example, we can see that the company’s response to the opportunities is
rather poor, because only one opportunity has received a rating of 3, while the rest
have received the rating of 1. The company is better prepared to meet the threats,
especially the first threat.

 Weighted Score

The score is the result of weight multiplied by rating. Each key factor must receive a
score. Total weighted score is simply the sum of all individual weighted scores. The
firm can receive the same total score from 1 to 4 in both matrices. The total score of
2.5 is an average score. In external evaluation a low total score indicates that
company’s strategies aren’t well designed to meet the opportunities and defend
against threats. In internal evaluation a low score indicates that the company is weak
against its competitors.

External factors Evaluation matrix (EFE) is used to audit the external factors of any
company. In EFE matrix the external factors are divided into opportunities and
threats. A company can capitalize on opportunities and avoid or reduced threats.

Following are the steps to develop EFE matrix.

1. List down the external factors.

2. Categorize factors in opportunities and threats.

3. Assign weight to each factor based on its importance, ranging from 0 (not
important) to 1.0 (most important). The sum of weight of factors must be equal to
1.

4. Assign a rating ranging from 1 to 4 to each external factor. The rating of each
factor shows how promptly firm strategies responding to each opportunity or
threat (1 = response is poor, 4 = response is extremely good).