The External Environment of Business

Author : Ami Fitri Utami, SE., MSM

Despite of the emergence of internal stability, a firm’s external environment is also challenging and complex for a business. Due to its effect on performance, firm must develop skills required to identify opportunities and threats that are a part of its external environment. In general, there are three major parts of external environment in business includes the general environment, the industrial environment and the competitor’s environment.

First, the widest environment which reflected in the general environment contains of segments and elements in the broader society which may affect industries and the competing firm inside. In this vein, the general environment classified into differed seven segments i.e: demographic, economic, political/legal, sociocultural, technological, global and physical. For each segment, the firm has to determine the strategic relevance of environmental changes and trends. These aspects are imperative due to current changes.

Moreover, the industrial environment has a more direct effect on the firm’s competitive actions and responses compared with the general environment. By this, the analysis of industrial environment might be done by using the five forces model of competition includes the threat of entry, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competition. By studying these forces, the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces to achieve strategic competitiveness and earn above-average returns.

While general and industrial environment urge companies to understand a wider external business environment, the competitor environment includes those strategic groups in the business population. Since competitive rivalry is greater within a strategic group, competitor analysis urges the firm to understand about the future objectives, current strategies, assumption, and capabilities of the companies with which it competes directly. These attempt also might called as a competitor intelligence which aimed to gather the set of data, information, and knowledge that allows the firms to better understand its competitors and thereby predict their likely competitive actions and responses.