Influence of the External Environment on Strategic Decision
Your business environment is much more than the sector or niche you operate in. Indeed, it informs everything you do as a business owner, and it is dynamic and ever-changing. In order to form a sound business strategy, you must have a firm understanding of your business environment. To do that, you need to know which aspects of the environment you should scrutinize on a regular basis. Read on.
In nature, the environment is host to all manner of species. These species fill various environmental niches. Businesses are very similar to this, with different businesses catering to different consumer demands. As in nature, when one element of the environment is out of whack, the entire web is affected. This can manifest as problems with inventory control, supply chain or employee morale.
Therefore, when considering strategy, you should look at the business environment as a whole first. A holistic approach will help you adjust for, avoid or anticipate macroeconomic effects.
Environmental analysis is the study of the organizational environment to identify factors that can have an impact, either positive or negative, on the organization itself. With environmental analysis, you can better identify the opportunities and threats provided by the business environment. This type of analysis provides company executives with a great deal of sensitivity to environmental signals. And, as you know, forewarned is forearmed.
In short, this type of analysis helps you proactively manage your business because you will have an understanding of the key factors at play. This, in turn, makes it more likely that the strategy you devise will succeed. After all, the business environment represents the total macro and microeconomic forces that, in large part, determine your success or failure.
It is essential that you, as the business owner, regularly analyze the business environment so that you can identify threats, anticipate changes and, if at all possible, influence the environment yourself.
Before defining strategy, you should have a firm understanding of your particular business environment. There are three levels:
- The macro-environment.
- The industry environment.
- The marketing environment.
The macro-environment is the holistic view mentioned above. The industry environment is a subset of that, and pertains to your industry or sector. The marketing environment pertains to the marketing strategies you might use to gain market share.
Within those three levels, there are several elements of the business enlivenment you will want to analyze.
Political factors influence regulations, and regulations shape your business environment. Therefore, it pays to stay up to date on the general political outlook. The common example of how politics can influence a business is to look at how import and export tariffs change over time. Tariffs imposed on another country or by another country can make it uneconomical to do business with that country.
Both microeconomic and macroeconomic factors influence how much revenue a business brings in per quarter. Keeping tabs on economic indicators can help you anticipate changes in the business environment. Over time, this attention to detail can save you money - or may even save your business. Economic downturns, while difficult to predict, do occur on a regular basis.
Culture changes all the time. What is socially acceptable one decade may not be the next. Profitable marketing tactics may become taboo or outright illegal. For instance, you’re probably aware that there was a time when cigarettes and other tobacco products were aggressively marketed, with little or no warnings about their potential health effects.
It’s imperative that you, as the business owner, are aware of any legal factors that might impede your ability to do business. Legal factors determine how the law affects the way you operate your business. Here are a few legal factors to be aware of:
- Discrimination laws
- Consumer laws
- Health and safety laws
- Fraud laws
- Import and export laws
Technology is always advancing, and staying abreast of the technological factors within your business environment can give you an edge. Adopting a new way of doing things is risky, but with risk, can come great rewards. For instance, business owners who embraced smartphone app development early had an advantage over their competitors, who did not.
Earth is the only home humanity has-at the moment. While great strides in green energy and recycling have alleviated some of the pressure, businesses and manufacturers remain under scrutiny and are expected to keep the environment as pristine as possible. What’s more, minimizing environmental impact can have a direct impact on the bottom line, because today’s consumers are more environmentally conscious than ever before.
The business environment is a complex, dynamic animal. In order to develop strong business strategy, you’ll need to get a firm grip on your individual business enlivenment. Do a thorough analysis of the factors above, and you’ll be off to a great start.