Industry environment

From CEOpedia | Management online

Industry environment - everything that is not a part of the industry, but has an impact on it. An industry environment is the sum of factors and processes that function in the company surroundings. These factors affect the business of a company because of the constant interactions between them. The environment is an external force towards the enterprise, while the company has no influence on some of the factors.

The company's environment can generate opportunities and threats for it, which is why it must be taken into account when building the company's strategy and setting its goals. Generally, the factors that make up the industry environment are constantly changing, so it is necessary for the company to monitor them and act accordingly[1].

Internal environment

The internal environment includes all the endogenous aspects of the company that are significantly influenced and controlled by the organization. The internal environment research needs to address all asset-related questions, overcome all problems related to resource management. It is the first step in creating a marketing strategy. All these elements create a value chain. The analysis of the value chain is predicated on the correlation between the assets of the company and its competitive positioning and explores how these components contribute to profitability[2].

Macro Environment

The macro-environment relates to the factors in the larger society that impact the micro-environment. It contains aspects like demographics, economics, natural forces, engineering, politics, and society[3].

Political and legal environment

The political environment consists of the day-to-day processes of a country, territory, and locality, government agencies with a legal identity to serve the community and activist groups that affect and regulate the actions of different organizations and individuals in society. Government officials formulate guidelines on cleanliness. Government agencies closely monitor ethical business practices.

Economic environment

The economic environment is determined by the general condition of the economy. The most important indicators informing about the state of this area are:

Sociological environment

The sociological environment consists of a cultural environment (traditions, ethical norms, customs, patterns, views, interpersonal relations), sociological (social structure, level of entrepreneurship, variety of social roles), demographic environment (structures diversified by sex, age, workforce, mobility) and educational (level of education, level of development and specialization), which are constantly changing.

Technological environment

The technological environment brings together knowledge and information about technology and technologies for processing natural goods into useful goods (manufacturing goods and services). The technological sphere affects the level of technological advancement of enterprises (technical progress), a number of functional features and useful products and their quality.

Microenvironment

Microenvironment consists of the factors that directly affect the enterprise[4].

Suppliers

Suppliers are companies as well as individuals who provide resources (raw materials, goods, capital, human resources, information) needed by the company and its competitors.

Customers

Customer is anyone who pays for the purchase of goods or services produced by the organization. These are entities purchasing goods for their own consumption or further distribution and acquiring rights to its ownership. The customer can be a person as well as a company.

Competitors

Competitors are other organizations that compete with a given organization for resources, most often for clients' money and a high-quality workforce. Most often, the resources that organizations compete for are customer money but enterprises can also compete for an educated workforce, rare raw materials or patents.

Public

Every entity that has an impact or influence on the capacity of the organization to achieve its objectives, for example, share-holders.

Examples of Industry environment

  • Economic Environment - This refers to the macroeconomic factors such as inflation, interest rates, tax policies, and government regulations that can affect the industry. For example, a high inflation rate can cause costs of production to increase, thus hurting the profitability of companies within the industry.
  • Social Environment - This refers to the trend of consumer tastes, demographics, and values that can influence the industry. For example, rising consumer interest in organic foods has led to a surge in demand for organic products, thus impacting the food processing industry.
  • Technological Environment - This refers to the level of advancement in technology that can influence the industry. For example, the emergence of artificial intelligence and automation has led to increased efficiency in the manufacturing industry.
  • Competitive Environment - This refers to the number and type of competitors that are in the industry. For example, the retail industry has been experiencing intense competition, with a large number of players competing to offer the best prices and services.
  • Political Environment - This refers to the government policies, regulations, and laws that can impact the industry. For example, the introduction of strict environmental laws has led to increased costs of production for companies in the energy industry.

Advantages of Industry environment

The industry environment provides a number of advantages to businesses. These include:

  • Increased competition and access to new markets - The industry environment encourages businesses to be more competitive and innovative, as they are constantly trying to outperform their rivals. This can help them gain access to new markets and expand their customer base.
  • Access to resources - Companies can benefit from the resources available in the industry environment, such as skilled labor, materials, and capital. This can help them reduce their costs and increase their productivity.
  • Access to technology - Companies can take advantage of the latest technology and trends in the industry, which can help them create new products, improve their existing products, and stay ahead of the competition.
  • Improved customer service - Companies can focus on providing better customer service by understanding their customer’s needs and responding to them quickly. This can help them build customer loyalty and increase their sales.
  • Innovation - The industry environment encourages businesses to be creative and come up with new ideas to stay ahead of the competition. This can help them develop new products and services that can help them stay competitive.

Limitations of Industry environment

An industry environment has a range of limitations that can affect the operations of a business. These limitations include:

  • The general economic state of the country, which can affect consumer demand and the cost of goods or services.
  • The level of competition in the industry, which can limit the ability of a business to command premium prices and gain market share.
  • The availability of resources, such as capital, raw materials, and labor, which can increase costs and limit production.
  • The regulations and legal environment imposed by governments and other authorities, which can affect the cost of doing business, the ability to export, and the ability to access certain markets.
  • The technological environment, which can limit the ability of a business to innovate or keep up with the competition.
  • The social and cultural environment, which can affect consumer demand, the availability of labor, and the cost of doing business.

Other approaches related to Industry environment

Introduction: There are many other approaches related to Industry environment. These are:

  • SWOT Analysis - It is a strategic planning method that evaluates the Strengths, Weaknesses, Opportunities, and Threats of an organization, and is used to assess the internal and external environment of the industry.
  • Porter’s Five Forces Model - This model analyses the industry environment by taking into account five factors: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and the intensity of competitive rivalry.
  • PESTEL Analysis - This analysis examines the external environment of the industry, and includes Political, Economic, Social, Technological, Environmental, and Legal factors.
  • Value Chain Analysis - This model examines the activities that take place in the industry, from the raw material to the end product, to determine where the value is created for customers.
  • Industry Life Cycle - This model looks at the stages of growth in an industry, from the introduction of a product to its decline, in order to identify where the industry is in the cycle.

Summary: The different approaches related to Industry environment are SWOT Analysis, Porter’s Five Forces Model, PESTEL Analysis, Value Chain Analysis and Industry Life Cycle. Each of these approaches provides a different perspective on the industry environment, and can be used to understand the factors that affect the business.

Footnotes

  1. ↑ Lall S., Mengistae T. (2005), pg. 4-6
  2. ↑ Caescu S. C., Popescu A., Plesteanu M. G. (2011), pg. 732
  3. ↑ Craig T., Campbell D. (2012), pg. 121-143
  4. ↑ Kumar V. (2018), pg. 10-11


Industry environment — recommended articles
Factors affecting business — Macro environment analysis — Domestic market — Opportunities and threats — Context of the organization — PEST analysis — STEEPLE analysis — Examples of opportunities — Near environment

References

Author: Agnieszka Krztoń

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