Analysis Of The External Environment Of Business

Analysis of the External Environment of Business

In today's highly competitive market, businesses must be aware of the environment in which they operate and the external factors that influence them. These factors can affect the main internal factors of the business and its objectives or marketing strategies.

The external environment is rarely stable and many of the external forces can change quickly and dramatically and are usually beyond a firm's control. Although some external factors can pose a threat to a business, they can also create new opportunities.

In order to assess their environment, a business may use a PEST analysis structure to evaluate the external influences or macroenvironmental factors that could affect the strategic development of the business under four areas; political factors often look at areas such as tax policy, employment laws, environmental regulations, trade restrictions and tariffs and political stability. The economic factors include economic growth, interest rates, exchange rates and inflation rate. Social factors are concerned with the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. The technological factors involve ecological and environmental aspects and can determine the barriers to entry, minimum efficient production level and influence outsourcing decisions. It looks at elements such as research and development activity, automation, technology incentives and the rate of technological change.

I am going to concentrate on the social dimension as the focus of this essay.

Consumer markets of the social environment can be roughly segmented into several areas; demographic factors such as age, gender, religion, ethnic group, family size and family life cycle stage, can influence businesses involved in children's products or retirement homes, for example. Socio-economic factors such as social class, income or occupation, can have an effect on the luxury product market or discount goods. Geographic features, like country, region, urban or rural areas, town or city and climate may affect businesses concerned with country clothing or regional specialties, for instance.

Psychographic factors such as lifestyles, values and personality can influence health or cosmetic businesses & mediagraphic factors involve media habits, such as newspapers people read. Finally, behavioural characteristics, for instance the occasion of purchases, brand loyalty or attitudes towards products can affect businesses involved in greetings cards, for example.

Due to the varying nature of the social dimension, it is important for businesses to carry out appropriate marketing strategies regularly, relevant to each external factor to give their product or service competitive advantage for their target market.

For example, between 1971 and 2003, household spending on alcohol and tobacco decreased, whereas spending on healthcare doubled, according to research by ONS1.

Social changes may provide a necessity for businesses to diversify their product portfolio to keep up with the changes in trends and consumer behaviour.

The increase in health awareness has caused a change in consumer lifestyle and therefore an increase in products and services that follow this trend, for example, organic products on the market, health club and gym memberships and healthier food, such as 'good for you' ranges in supermarkets.

Soft drinks giant, Coca-Cola, was knocked off the carbonated drinks market leader top spot in 2004 by rival PepsiCo due to Coca-Cola's slow acceptance of the changing market landscape. PepsiCo had already begun to profit from their healthier products, such a fruit juice, whereas Coca-Cola was still only producing their fizzy drink products2.

Now, however, not only does Coca-Cola produce fizzy drinks, but also fruit juices, sports drinks, bottled water, energy drinks, tea and coffee, milk and soup3.

The demography of a country can influence business activity. For example, the population provides producers of goods and services, as well as the consumers of goods and services. The quantity of labour can depend on the population size, for example, and the quality of labour can depends on things such as the level of health care, education and training.

Also, the age of the population has some bearing on business. The ageing population in which we live is currently having an affect on business as well as creating one in the future. The demographic time-bomb will create an increasingly dependent population, leading to an increase in the demand for healthcare, social services, state pensions and social security arrangements, for example.

Businesses are not only influenced by their immediate markets but also by markets at different spatial levels, such as local, regional, national, supranational and international levels. For example, the regional redistribution of the population will affect a wide range of businesses from housing to transport and the local labour market. Local and national factors will be most important for small businesses but larger companies will need to consider the environment in any countries in which they do business, as well as the global scene.

Carrying out a PEST analysis may also provide help for businesses when attempting to enter a new market, especially one in another country. Analysing possible social barriers to entry, such as language, dominant religion or different attitudes towards foreign products or services can prove to be a powerful risk assessment strategy and give a business competitive advantage over other foreign businesses trying to penetrate the same market.

Not only is the social environment affected by different special levels, but also by other dimensions of the external environment. Differences in consumer lifestyle and behaviour, such as the trend of internet shopping, reflect the increasing demand for 'instancy'.