External environment or far environment includes a combination of all factors coming from the outside of the organization that affect its performance. The company itself, however, does not affect on them. An example might be a change of the ruling elites, regulations or demographic trends. Analysing the far environment further not have a clear canon of research and well defined scope. Analysis depends primarily on the level of gravity of the phenomenon for the manager and his own interpretation of the opportunities and threats.
Macroeconomic environment is the set of all factors affecting the behavior of organizations. Macroeconomic environment therefore consist of demographic factors (e.g. population growth, gender and age structure), economic (e.g. economic policy), political and legal (e.g., regulation), socio-cultural (e.g., traditions and standards), natural (e.g. climate), technological (e.g., level of technological development) and ethical (e.g. norms, values).
Components of the external business environment
The immediate far environment include:
- economy - a condition of the economic system in the area where the organization operates. The most important are: interest rates, unemployment, inflation and demand. In the case of inflation growth, the company is forced to acquire more expensive resources, that subsequently raise cost of production. In case of high unemployment the company can afford a big selection and pickiness in looking for new employees. When interest rates rise, potential consumers are less willing to lend money, and the organization must pay more for loans taken.
- sociocultural dimension - habits, values and demographic characteristics of the population. This dimension shows the trends in the social environment which could affect sales of the company. This factor is subject to constant change. An important role is played by the tastes, age, gender, quality of life and habits.
- technological dimension - access to modern technologies, which allow company to transform resources into goods or services intended for consumers. Great importance is the economic development in particular country, the government's approach to funding scientific research and innovation.
- political and legal dimension - is a reference to the state regulation of economic activity and prevailing relations between the state and the economy. The significance of this dimension, stems from fact that legal system, partially defines what a company can and can not do. And the mood in government circles and political stability of the country strongly influence prevailing socio-economic conditions.
- international dimension - is mostly related to political and legal dimension, in regard to international country to country cooperation and relations. This dimension affects the state of the company, which has branches abroad or are directly connected with the foreign economy.
The external environment is often called general environment. It shapes manager's decisions, objectives and principles of operation of the company. Proper observation and analysis of far environment makes it possible to formulate objectives and long-term plans, reflecting the optimal development strategy of the company.
External environment also includes influences of ecosystem and natural environment in which the company performs its production activities.
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