Page 2: The external environment
A business does not function in a vacuum. It is subject to influences from outside the business. These influences make up the external environment.
The main factor affecting most businesses is the degree of competition the comparative strength of other businesses that make the same or similar products. The other external factors can be grouped under five headings:
- Social - trends relating to the population in the regions that a business operates. These include factors relating to the available workforce and to consumers.
- Legal - the legal framework in which a business must operate.
- Economic - the general economic situation affects most businesses. Changes in inflation, exchange rates and levels of consumer confidence can have a big impact on a business.
- Political - government policies can have an effect on business, for example, changes in tax rates or changes in the level of the minimum wage.
- Technology - changing technology brings both opportunities and threats for business. For example, the growth of the internet has changed the way many companies do business, but this makes information more easily available for copying.
A business has little control over external factors, but has to deal with them in order to achieve its aims and objectives. This means that main internal functions of the business must take note of the external environment. Many businesses evaluate their external environments using an important tool called SLEPT analysis. This analysis considers, in turn, the effect of social, legal, economic, political and technological factors on the business.
For example, factors that may occur in the external environment of a pharmaceutical company operating in the UK include:
- Social - the UK has an ageing population, increasing demand for certain types of drugs
- Legal - the introduction of new drugs is closely regulated
- Economic - the value of sales of products to other countries with large customer bases, for example, the USA, will go up or down depending on currency exchange rates
- Political - pharmaceutical companies are challenged to provide essential drugs at lower cost to developing countries. However, this may conflict with the high costs of developing new products
- Technological - new technology can be used to discover, develop and produce new drugs.
It is important that a business can recognise relevant global and local issues, and then analyse, react to or plan for their impact. It needs to evaluate the impact of each element of the external environment on its business model. Issues relating to intellectual property are also subject to change.
By analysing its own external environment, the IPO can make sure that it is providing the correct support to the business world. A SLEPT analysis allows a business to develop strategies to deal with external influences.