External Factors

Economic environment

This is the state of the economy in any country where the organisation operates, including; where it is based; countries into which it sells; countries from which it sources products and services.

Issues such as inflation, interest rates, employment, and economic growth or decline all affect the success of an organisation. The organisation needs to be steered through the ups and downs of the economic cycle.

Technological advancements

Technological developments can give organisations a competitive advantage. Recent changes in internet and ebusiness technology have made a dramatic impact on many businesses. Developments in technology also enable more efficient processes, faster research and development and improved sharing and use of data.

These are all illustrations of why successful organisations should keep abreast of emerging technologies.

Social environment

Organisations are increasingly recognising that they have a requirement to demonstrate to their stakeholders that not only have they effectively managed finances, but also that they have managed their business in a way that is ethical and sustainable.

All aspects of corporate social responsibility are increasingly impacting upon organisations, those that ignore the issues risk damaging their reputation, losing the support of shareholders and customers and ultimately failing.

Political environment

Like the economic environment, the political environment is an important factor of success within all countries within which the organisation has dealings. Issues such as tariffs and quotas inhibit trade, whilst the threat of war or hostility between countries stifles long term relationships. The political environment must be monitored closely. This is particularly important for businesses that operate internationally.

Legislation and regulations

All organisations have to work within a complex legislative framework with laws affecting all aspects of their activity from employment to sales. Organisations use their trade associations to lobby government to make legislation practicable but once it is enacted, law must be complied with. Ignorance of a law is no excuse to flout it and is not considered an acceptable defence. Therefore the legislative and regulatory environment must be monitored by all organisations.

Competitive environment

This relates to the competition in the marketplace. Michael Porter’s Five Forces is a useful tool for analysing the competitive environment including the threat of new entrants, the threat of substitutes and buyers’ and suppliers’ negotiating power. All organisations, but particularly those in commercial business, need to monitor the competitive environment.