External Business Environment - Literature review Example

External business environment (Name) (Institution) (Course name) (Course code) (Module) (Instructor’s Name) Date of submission Introduction Business strategy by a firm is formulated in a way that is takes into considerations all the developments taking place in the environment. Ghuman (2010) defines external environment as “all the institutions and forces that have an actual or potential interest or impact on the organisation’s ability to achieve its objectives” (36). The external environment thus includes the social cultural scene, economy, government, ecology and competition. Broadly speaking, business strategy is formulated with the internal and external environments in mind (Grant 2009; Thompson & Thompson 2010). The internal environment is fundamentally pertains to issues or developments relevant to the business that the organisation has direct control over. This include issues such as management style, organisational culture knowledge management etc (Thompson & Thompson 2010). On the other hand, the external environment comprises of issues and developments that the firm has no direct control over. Therefore, it implies that the firm can only respond. Such elements include economic growth political/legal climate, technological growth, socio-cultural aspects, demographic aspects etc (Thompson & Thompson 2010). Businesses have to consider and understand both environments equally well as none is superior to the other. This paper will however discuss the external environment only and assess how this environment influences business strategy. Literature review A number of authors highlight the importance of external business environment by noting that it can present both business opportunities for growth or challenges that inhibit growth (Hitt, Ireland & Hoskisson 2009; Grant 2009). Therefore, firms have to carry out an environment al analysis need to understand the challenges and opportunities posed by the environment. Apart from influencing, strategy, the external business environment has a far reaching impact on the organisation goals and objectives, mission and vision statements (Hitt, Ireland & Hoskisson 2009). In international business expansion, external environmental analysis takes a more central role in influencing strategy. For instance, the mode of entry is fundamentally founded on the foreign government’s policies towards foreign players and the institutions put in place to encourage or discourage that (Klapper, Lewin & Delgado). A global business strategy calls for a global business environment analysis. Goldman and Nieuwenhuizen (2010) say that the external business environment in the global context has gained increased attention in the face of globalisation thus it should be considered as a separate environment altogether albeit within business environment. This suggestion is further made by Ghuman (2010) and Grant (2006). The authors agree that the scope of the industry and the business concept of the firm determine the extent and the influence of the external environment on business strategy. Majority of modern day organisations are caught between adopting a global strategy in response to the global business environment and adopting various strategies each responding to individual markets and their respective business environments (Grant 2006). The choice of strategy is highly determined by how the firm understands its environment and the influence on performance and success of the firm in general. The different elements of the environment are best understood when analysed separately. The elements of external business environment are referred to as sub-environments. However, some authors such as Goldman and Nieuwenhuizen (2008) refute the use of the term ‘element’ and ‘sub-environment’ interchangeably. This is because in their book they have identified elements in the sub-environments. Stonehouse and Campbell (2004) write that there are various ways of conceptualising the external environment. One of the ways that the authors suggest is to perceive the environment as a network of interrelated macro and micro environments. This emanates from the fact there is no single industry or market that is entirely independent. Industries and markets are interrelated hence the environments are related too. These sub-environments also apply to international firms and domestic ones. International firms are traditionally expected to be predisposed to higher level interaction than domestic firms. However, the authors indicate that this is not always the case because the scope and level of networks in an industry is determined by the type of industry and the business concept and not the physical size of the market. One core sub-environment that Goldman and Nieuwenhuizen (2008) identify is the market environment. The market environment in their analysis deals with variables such as customers and consumers, suppliers and competitors. Consumers fall within the external environment because the firm has no control over their tastes and preferences. Changes in these tastes and preferences affect business strategy. Majority of firms are customer oriented and seek to achieve their goals and objectives in satisfying consumer needs (Grant 2009). Failure to meet these needs in a perfectly competitive market implies that consumers will purchase goods/services from an alternative source. In monopolistic markets, the importance given to this environment is not comparable to the one in a perfectly competitive market environment where there are many suppliers (Thompson & Thompson 2010). The other core area in the market sub-environment is suppliers. The term suppliers in this case imply suppliers of raw materials to the firm and the distribution channels of the firm. Organisations have to set standards for the quality of raw materials they expect from their suppliers. More often than not, the quality of raw materials is evident in the final product. Firms that outsource core services or components of their products/services are required to be more vigorous in monitoring this sub-environment (Thompson & Thompson 2010). Some suppliers have the ability and capacity to influence the type of products that firm deliver to the market depending on the nature of the market and industry. Where there are few suppliers, firms have few options in altering the source of their raw materials and the final product (Grant 2008). The other side of the supply side issue is equally important. Distributors such as chain stores and supermarkets have specialised business activities. This implies that distributors dictate on which firms products and services that they can deal with. In international business, the distribution channel is one core determinant of IB strategy which has a great bearing on the mode of entry in the new market. For every action by a player in the market, there is a reaction from competitors. A firm should thus be keen to develop a strategy that is informed about the activities of competitors in order to protect its competitive advantage. “If the business does not keep abreast of the competitive strategies of its rivals, there is a real threat of rivals poaching market share” (Goldman & Nieuwenhuizen 2008, 49). It is paramount at this juncture to note that organisations n do not own strategies. Whittington (2006) says that no single organisation has a patent t strategy hence they do not own strategies but have a unique way of doing things identifiable with them. Therefore, firms can respond to competitive strategies from other players by copying the same strategy and using it in their business processes. However, this kind of behaviour does not create a unique identity of the firm. It is thus imperative that firms should modify strategies borrowed from competitors to fit with their internal environment driven strategies and their business model. There are various ways through which firms can analyse the external business environment to inform strategy formulation. Michael Porter from the Harvard Business School developed the five forces markets analysis tool (Thompson & Thompson 2010). This tool analyses strategy influencing forces in the market namely; bargaining power of buyers, bargaining power of suppliers, barriers to market entry, threat of substitutes and competitive rivalry. The higher the bargaining power of buyers, the more vulnerable the firm is to machinations and demands of the suppliers. The firm’s strategy has thus to be bent on managing the bargaining power of suppliers to avoid be held at ransom. On the other hand, firms will seek to reduce the bargaining power of buyers by offering a wide range of products and pricing them differently. Buyers can thus access products they wish to without bargaining the prices. Understanding barriers to market entry is most relevant to new businesses or firms entering a new market. Barriers to market entry can be enforced by the government, natural events or by an agreement among existing players through a cartel. Where possible, firms operating in a certain industry can collude to prevent other players from entering the market. Alternatively, the government through can maintain or give a monopoly to a single players (Thompson & Thompson 2010). When this occurs, firms outside that industry have little they can do to gain entry. The competitive rivalry refers to the already aforementioned issue of the activities of the players. Firms in a given industry do no develop their strategies blindly but try to differentiate their products and services from competitors. In other cases, some firms, especially small ones thrive on imitating bigger firms in their strategy and products offered. PEST analysis tool is another external business environmental analysis tool. This tool has been modified numerous times to include PESTEL/PESTLE, and SLEPT. Whatever the acronym, the basic idea is the same. The original PEST test was developed to assess the political, economic, socio-cultural and technological environment in a given market (Wall 2002). The name PEST is an acronym derived from the variables it assesses. The ‘E’ and ‘L’ in PESTEL and PESTLE stand for ecological/ environmental and legal issues in the market environment. In modern times, environmental concerns have gained prominence in business strategy as modern day marketers have used the environment as a marketing point of their products. Marketers are increasing targeting environmental conscious consumers who are keen on keeping a fair carbon footprint record through the products and services that they consume. The law on the other hand has come into place in some countries to enforce environmental laws that offer a framework for firms to follow in their business processes regarding environmental protection and conservation. ‘Sustainability’ and ‘green production’ are relatively new but loaded terms in the world of management today (Klapper, Lewin & Delgado n.d.; Figge, Hahn, Schaltegger & Wagner 2002). Firms that ignore their sustainability record and green products consciousness are courting trouble. The aforementioned tools do not provide mechanisms for collecting data from the field. Some of the methods suggested by Hitt, Ireland and Hoskisson (2009) are scanning, monitoring, forecasting and assessing. Scanning entails studying all segments in the general external environment. Through scanning, firms can identify early signs of change in the environment and also identify ongoing changes. Scanning is most appropriate for firms operating in highly volatile markets where changes in the business landscape are very often. However, scanning gives unorganized and uncoordinated data. This at times makes the data appear unimportant. However, fragmented changes in the environment are just sections of some bigger changes hence cannot be ignored. Hitt, Ireland and Hoskisson (2009) thus suggest that organisation should have appropriate and adequate scanning systems that are able to detect unrelated changes into something tangible. Computer applications and software have come in handy in this area. The applications are used to sift through information available in public sources and gather relevant information that can affect strategy. Virtual companies and those running websites use ‘cookies’ to obtain information about the people visiting their websites. However, this data gathering method has raised a lot of ethical questions given that web users are not aware that such companies solicit information about them. Monitoring is another method of collecting data and information from the external environment. Monitoring advances the work of scanning. The changes observed through scanning are monitored to check out whether they form a pattern that is relevant to the operations of the firm or the industry. Demographic and economic changes are some of the most monitored changes in any given market and industry. By monitoring trends, firms are capable of timing the introduction or launching of their products in the market. Again monitoring trends carefully enables marketers to identify any arising needs in the market. As such, efficient monitors have the advantage of developing goods and services that arise from changes in the environment before competitors can do so. Nonetheless, trends and patterns do not only emerge from one section. Trends and developments an all stakeholders would be identified and interpreted. Firms thus need to base their strategy involving all stakeholders depending on the trend and interpretation affecting each category of stakeholder (Hitt, Ireland and Hoskisson 2009). Forecasting as opposed to scanning and monitoring envisions the future relevant to business. Forecasting involves making projections or deriving future scenarios depending on current and past data. Forecasting events and outcomes is often challenging. Many firms are keen on forecasting the patterns of the internal business environment. Effects of government policies such as taxation on business are some of the most forecasted variables in the external environment (Hitt, Ireland and Hoskisson 2009). Changes in political leadership and regional trade alliances have also a great influence on businesses and firms are keen to predict and forecast the impact such developments have on the individual firm and the industry in general. In most cases, firms alter their production in respect to forecasted changes in demand prompted by observable trends in the business environment. Some business environment forecasts are made by independent and non business bodies. For instance, IMF forecasted a downfall in global aggregate demand following the financial crisis that afflicted the US in recent times. Assessing is a step ahead of scanning, monitoring and forecasting. It specifically identifies the implications of the changes in the environment in business strategy. Through assessing, the firm utilises the knowledge and data obtained to develop and protect its competitive advantage. Without assessing, the firm is left with data that may be interesting and important but of unknown value to the firm in of competitive advantage. Hitt, Ireland & Hoskisson (2009, 39) “research found that how accurate senior executives are about their competitive environments is indeed less important for strategy and corresponding organizational changes than the way in which they interpret information about their environments.” Consequently, after gathering information from the environment, the interpretation of such information to understand whether the changes present an opportunity or threat is of utmost importance. Conclusion There has to be a strong link between business strategy and changes in the business environment. The firm has to be aggressive in its operations and strategic behaviours and match with the opportunities and challenges presented by the changes in business environment (Zott & Amit 2008). Since the firms cannot control changes in the external environment, the best response is adapting to them which is reflected in the business strategy adopted. The firm has thus to develop a knowledge database of past environment analysis to be used in future (Sveiby). The ease and success of adapting to these changes is however, dependent on the internal business environment. This therefore confirms that both the internal and external business environments are equally important in business strategy formulation. The matching of the responses from the external environmental trends and business strategy thus achieves superior organisational performance. On the other hand, the use of the right analytical tools and data collection methods have to used in order to benefit from the analysis of the external environment. Failure to do so makes the exercise futile and may result in disastrous strategies. References Figge, F. Hahn, T. Schaltegger, S. & Wagner, M. (2002). “The sustainability balanced scorecard – linking sustainability management to business strategy” Business Strategy and the Environment. 11, 269–284. DOI: 10.1002/bse.339 Ghuman, K. (2010). Management: concepts, practice & cases. New York: McGraw-Hill Education Goldman, G. & Nieuwenhuizen, C. (2008). Strategy: Sustaining Competitive Advantage in a Globalised Context. London: Juta and Company Ltd Grant, R. 2009. Contemporary Strategy Analysis. London: John Wiley and Sons Thompson & Thompson( 2010). 6th ed. Strategic management 6th ed. Melbourne: John Wiley and Sons Hitt, M., Ireland, R. & Hoskisson, R. (2009). Strategic management: competitiveness and globalization : concepts & cases. Sydney: Cengage Learning Klapper, L., Lewin, A. & Delgado, J. (2009). “The Impact of the Business Environment on the Business Creation Process” Policy Research Working Paper Series. Policy paper 4937 Stonehouse, G. & Campbell, D. (2004). Global and transnational business: strategy and management. London: John Wiley & Sons Sveiby, K. (2001). “A knowledge-based theory of the firm to guide in strategy formulation” Journal of intellectual capital. 2(4), 344-358 Thompson, J. & Thompson, F. 2010. Strategic management, 6th ed. London: Cengage Learning Wall, N. 2002. External influences. London: Heinnemann Whittington, R. (2006). “Completing the Practice Turn in Strategy Research” Organization Studies 27(5):613–634 Zott, C. & Amit, R. (2008). “The fit between product market strategy and business model: implications for firm performance” Strategic Management Journal 29: 1–26 Read More