The Impact of External Environment on Strategy Essay

The External Environment and Strategy

A business operates in an open system. It does not operate in a vacuum. The business has to consider all the dimensions of the external environment such as the regulatory/legal, economic and social environment. The company has to carry out a SWOT analysis.

This is where the company looks at all the threats and opportunities in the external environment. It also analyses its strengths and weaknesses so as to know whether it is equipped to face the threats and take advantage of the opportunities in the external environment¹.

A strategy refers to the action plan in the company operations. It relates to how the company will conduct its business in order to earn higher profits². It entails the kind of products that the company will produce and the markets that it hopes to penetrate.

The external environment may adversely or favorably affect the business. The company however should ensure it is not caught unawares. It should be conversant with the trends in the legal/political, social and competitive markets. The strategic leader understands that the external environment is dynamic and highly turbulent³. He has to be flexible, having contingency plans dependent on what happens in the external environment.

The Legal and Political environment

This is an area that can be quite a threat to the company as it carries out its business activities. New laws can be enacted that can adversely or favorably affect the sales of the business. Research studies especially in the health sectors may reveal the dangers of certain components such as metal packaging for food.

The companies may have to change its packaging and use glass packaging. Over time, the operations of a company may become unacceptable and the company may have to stop the operations. The country may also change its laws on protectionist laws and tariffs in the country.

The company may find itself faced with intense competition as the rate of globalization increases. The company will have to change its strategy and be innovative in order to survive⁴. It may work well for the company that had been trying to enter certain markets but there were great barriers.

Once the barriers are lifted the company finds it has great untapped market to sell their products. Companies that had ventured into certain countries through joint ventures had to leave when the governments decide to nationalize companies in different industries.

The political environment also affects the strategic operations of the industry. Political unrest and instability in certain countries have caused companies to exit these markets and choose other markets to invest in.

The Competitive environment

One of the biggest factors in the environment that affects the business strategy is the competitive markets. Michael Porter identified five factors or aspects in the competitive markets. The first aspect is the barriers of entry into the market.

The company assesses the barriers to entry such as capital requirements, technological aspect and the government tariffs and quotas. In a market where the capital requirements to start the business is high, the company may opt to form ventures in order to share costs⁵.

A company may opt to have mergers and joint ventures to ensure easier penetration in the market⁶. When they are new entrants in the market, there may be shifts in market share of the company due to the new competition. The other factor to consider is the presence of substitute products in the market⁷.

The company will have to be innovative in a markeet with many similar goods so that they can offer to the public a differentiated product. They will have offer something different to the customer that will make them stand out. They may offer excellent customer service, efficient services or cheaper products.

Another factor to consider is the bargaining power of the buyers. If the company is a monopoly, then the business will not be threatened by customers as they cannot influence the product prices. There are markets where the customers can affect the prices of the goods. They may force the price down if they come together.

The customers may be very sensitive to cost differences and influence the market prices of the good. The fourth factor that the company should consider is the bargaining power of the suppliers. The price of the supplier goods affects the costs of production and further affects the prices at which the company will sell their product.

The suppliers will have a great influence if they are few⁸. When they are many, an individual supplier will not have influence on the price of materials. Finally, the company considers the rivalry between the existing firms.

As the company decides whether to invest in a certain market, it looks at the direct competition it would face if it entered into the market. In industries that have intense competition there are many companies of the same size that offer the same products.

Such industries have high rates of market exits as the competitive environment is too tough for certain businesses. The companies in the industry will also experience low rates of growth.

The company has to be aware of what the competitors are doing and offering in the market. The competitors pose a threat to the company and it has to work hard to stay ahead of the competition.

The Technological Environment

The technological advancements in the external environment will also affect the strategy of the organization. There are great opportunities that the company can take advantage of in this aspect of the external environment⁹.

If the company does not keep itself aware of what is happening on the technology front, they will find themselves with outdated and obsolete products. Customers will go to competitors to get the latest products. This is an area for the company to show the public that it is the best in the market.

With the use of technology, the company will be able to provide to the customers with differentiated products. Companies have become innovative to create a competitive advantage in the markets.

Great innovations occurred when the computer companies linked with the telecommunication industries. Companies are merging their website and mobile communication to communicate effectively with their customers.

The Social Environment

There are four aspects of the social environment that will impact the company strategy. The first one is the customer’s preferences and wants. The customer’s desires are never static. A good example is the move by customers towards products that are herbal.

Once companies realized that this is what the customers wanted, companies produced a product line for herbal products in order to address these specific customer needs. The impact of customer preferences has led to low fat milk products.

Companies do not want to be in a position where they lose out on reaching a particular market segment. The customers keep on changing their wants therefore influencing the kind of products in the market. If the company wants to succeed in the market place, their strategic operations will move to fulfill the need in the customers.

Companies pay a lot of money in market surveys and research on consumers to find out if their customers are pleased. Ignorance and assumption will cause the customer to seek competitors for substitute goods.

In order to be the preferred brand in the market, the company management has to look out for the opportunities in the market to address the customer’s needs. The second dynamic in the social environment is the culture and societal expectations.

In going to different markets especially in the global markets, the company has to put into consideration the people’s culture. In certain areas the standard product may not sell. There are companies that have experienced failure when they launched products in different countries.

The products were not selling. Take a case of a toothpaste company that has the tag line “use of the toothpaste will whiten teeth”. The product sales may never pick up in certain Asian areas because in that region since having yellow teeth is considered prestigious.

The third aspect in the social environment is the aspect of social responsibility. In the world today, companies have had to involve themselves in corporate responsibility initiatives.

The customers and the community at large in the recent years have come to expect companies to take active steps in ensuring the least damage to the environments especially for manufacturing companies. They are expected to participate in sponsoring community projects like sports and charity walks.

This is an opportunity for the company to foster great customer goodwill and reputation in the market place. The customers will tend to view the company positively. There are business ethics to be considered. The business in pursuing its economic goals has to ensure it follows fair and honest market practices.

The demography of the population will also influence the company’s strategy. In countries where the young population is being rapidly being replaced by the older generations due to reduced birth rates, companies have to employ different strategies.

For companies looking to recruit the young people, they may be forced to recruit from other countries or outsource services. They may also choose to come up with a program for the recruitment of the older workforce. This may involve learning what are the dynamics involved in recruiting the older working force.

The government may increase the retirement age of the working force causing the company to reconsider their recruitment plans for the next five years.

For companies that sell goods and services to the young people, they will face a diminishing market for their products. They will opt to diversify their product range and produce goods that cater for the older generation.

The Economic Environment

The economic environment also affects the business strategy of the company. In times of economic depression, the company will not be able to sell the volumes of goods they had anticipated. They have to re-strategize on how they will survive in the harsh market environment.

In times of economic boom, the company re-strategizes on how they will take advantage of the excess cash and deposits that the customers have.

If a company provides goods that are purchased because the people have constraints in the level of income that they earn, an upward shift in the disposable income will lead to the company losing out on sales.

Other factors in the economy are the monetary and fiscal policies. The government in controlling expenditure and inflation may change the fiscal and monetary policies. The rate of borrowing money may be so high causing the company to consider other sources of finances.

The government’s issue of bonds may lead to the company changing its capital structure in order to take advantage of the investment opportunities.

Economic conditions in dependent industries will also adversely or favorably affect the strategy of the organization. When the prices of goods in related industries rise t the costs of production rise.

Conclusion

In light of the above aspects of the external environment, it is evident that the external environment affects the strategy of the firm in several ways. The company has to consider all the aspects so as to take advantage of the opportunities in the external environment.

The company has to identify its core strengths so as to create a competitive edge. The company should address the threats in the external environment adequately so as to survive in the market place¹⁰.

The strategic leader will always be analyzing the trends in the external environment. He anticipates the future business environment and takes steps to ensure the company will be thriving in the future¹¹.

References

V., Alina, B., Nicoleta, P., Denisa &, I., Carmen. The Impact Of External Environment on Organizational Development Strategy. 2010. Web.

H. Ansoff. Implementing Strategic Management. New Jersey: Englewood Cliffs. 1985.

A. Campbell, G. Michael & A. Marcus Corporate strategy: The quest for parenting advantage Harvard business review, 1995. Web.

G. Cole. Strategic Management. London: Letts Educational. 1997.

C. Dobbins (2010) Strategic Planning: External Environmental Scanning, 2010. Web.

M. Guillot. Strategic Leadership, Defining the Challenge. Air and space Journal, 2003. Web.

J. D. Hunger and T.L. Wheelen, Essentials of Strategic Management, Prentice Hall, 2001.

A. Miller, S.Mary & L. Linda.Competitive advantages in new corporate ventures: The impact of resource sharing and reporting level Journal of Business Venturing Volume 6, Issue 5, September 1991, Pages 335-350. Web.

M. E. Porter, Competitive Strategy, New York: Free Press, 1980.

S. Skaik, Implementing strategic management in construction. Construction management guide, 2009. Web.

R. Whittington What is Strategy – and Does it Matter? UK: Thompson Learning. 2002.

Footnotes

¹ R. Whittington. What is Strategy – and Does it Matter? UK: Thompson Learning. 2002, p 5.

² Cole, G. Strategic Management. London: Letts Educational. 1997, p 11.

³ M. Guillot. Strategic Leadership, Defining the Challenge. Air and space Journal, 2003.

⁴ J. D. Hunger and T. L. Wheelen. Essentials of Strategic Management, Prentice Hall, 2001, pg 33.

⁵ A. Miller, S. Mary & L. Linda Competitive advantages in new corporate ventures: The impact of resource sharing and.reporting level Journal of Business Venturing Volume 6, Issue 5, September 1991, Pages 335-350

⁶ A.Campbell, G.Michael & A. Marcus Corporate strategy: The quest for parenting advantage Harvard business review, 1995.

⁷ M. E. Porter. Competitive Strategy, New York: Free Press, 1980, pg 3

⁸ C. Dobbins. Strategic Planning: External Environmental Scanning, 2010. Web.

⁹ V., Alina, B., Nicoleta, P., Denisa &, I., Carmen. The impact of external environment on organizational development strategy. 2010. Web.

¹⁰ S. Skaik, Implementing strategic management in construction. Construction management guide, 2009. Web.

¹¹ H. Ansoff. Implementing Strategic Management. New Jersey: Englewood Cliffs. 1985. pg 87.