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.
Impact of external environment on the company
The external environment can have a significant impact on a company's operations and performance. Positive factors in the external environment, such as a strong economy or supportive government regulations, can create opportunities for growth and success. On the other hand, negative factors, such as a recession or increased competition, can create challenges and threats to a company's performance.
Economic conditions, for example, can affect a company's sales and profits. A strong economy can lead to increased consumer spending, which can boost a company's sales and profits. However, a weak economy can lead to decreased consumer spending and lower sales and profits.
Competition is another important aspect of the external environment that can affect a company. Increased competition can lead to lower prices, reduced market share, and reduced profits. Therefore, companies must continuously monitor the competitive environment and adapt their strategies accordingly.
Technology is another important factor in the external environment that can impact a company. Rapid advances in technology can create new opportunities for companies, but it can also make existing products or services obsolete. Companies must stay informed about technological developments and invest in new technologies to stay competitive.
Regulations and societal trends are also important factors in the external environment that can impact a company. Government regulations can impose costs on companies and limit their activities. Societal trends can affect consumer demand for a company's products or services. Companies must stay informed about changes in regulations and societal trends and adapt their business practices accordingly.
Examples of environmental impact
There are many examples of how the external environment can impact a company, including:
- Economic conditions: A recession can lead to a decline in consumer spending and a decrease in demand for a company's products or services, resulting in lower sales and profits.
- Competition: Increased competition can lead to lower prices and reduced market share for a company, resulting in lower profits.
- Technology: Rapid advances in technology can create new opportunities for companies, but it can also make existing products or services obsolete. For example, the rise of digital cameras led to a decline in the film camera industry.
- Regulations: Government regulations can impose costs on companies and limit their activities. For example, stricter environmental regulations can increase a company's costs and limit its ability to operate.
- Societal trends: Changing societal trends can affect consumer demand for a company's products or services. For example, the growing concern about the environment can lead to a decrease in demand for products that are not environmentally friendly.
- Natural Disaster: Natural Disasters such as floods, hurricanes, earthquakes can cause damage to the company's facility, disrupt supply chain, loss of revenue and increased costs.
- Social media: Negative comments or reviews on social media can significantly affect a company's reputation and lead to a decrease in consumer trust.
|External environment — recommended articles|
|Examples of threats — Opportunities and threats — Factors affecting business — Environmental factors affecting business — STEEP analysis — Examples of opportunities — Macro environment analysis — Hegemony — Near environment|
- Edelman, L. B., & Suchman, M. C. (1997). The legal environments of organizations. Annual review of sociology, 479-515.
- Oster, S. M. (1999). Modern competitive analysis. OUP Catalogue.
- Porter, M. E. (2008). Competitive strategy: Techniques for analyzing industries and competitors. Simon and Schuster.
- Porter, M. E. (2008). On competition. Harvard Business Press.
- Robin, D. P., & Reidenbach, R. E. (1987). Social responsibility, ethics, and marketing strategy: closing the gap between concept and application. The Journal of Marketing, 44-58.