Business Environment
Assessment of the Environment
(Internal and External)
Ms Faith Moono Simwami
mo.simwami@gmail.com
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THE MEANINING OF THE BUSINESS
ENVIRONMENT
The external environment is everything outside an organization that
might affect it. An organization's external environment consists of two
layers:
• The general environment - refers to those nonspecific
dimensions and forces in an organization's surroundings that might
affect its activities. It includes all PEST factors.
• The task environment - refers to those specific organizations or
groups that are likely to influence an organization. It consists of
competitors, customers, suppliers, regulators, unions and owners.
Assessment of the
Environment (Internal and
External)
• The analysis of strengths and weaknesses of
organizations should follow the formation of objectives.
• The task involves more than just identifying and
evaluating an organization’s strengths and weaknesses.
• It requires capturing a sense of how those strengths and
weaknesses combine to help an organization position
itself in the market.
• This process of matching possibilities with capabilities is
basic to the development of strategies for achieving
objectives.
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Standard Techniques
• The following techniques are used to assess the
internal and external environment:
1. PEST / STEP Analysis - used to analyze the
external environment
2. SWOT Analysis - used to analyze both the
internal and external environment
3. Porter's Five Forces Model - used to
analyze an industry in which an organization
operates.
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Business Analysis Models
-PEST Analysis
What is PEST analysis?
• PEST analysis is an analysis model examining the external
environment and the global factors that may affect a business.
• It can provide a quick understanding of the external pressures
facing a business and their possible constraints on its strategy.
• It is usually divided into four external influences on a business
– Political, Economic, Social and Technological.
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Business Analysis Models
-Illustrations for PEST Analysis Models

Political

1.
2.
3.
© PhotoDisc
Purposes:
To find how political development,
locally, nationally, internationally
affect the strategy of a business.
Areas to be considered:
Consumer laws and regulation
Political pressures,
Government views on certain
business activities, including local,
national and international
government political issues
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affecting a business
THE GENERAL ENVIRONMENT
1. The Political/legal Environment
• The political/legal environment consists of the law and
interpretation of laws that require firms to comply with.
• Ignorance or noncompliance with the laws, could result in
fines.
• Operating within the legal framework is both socially
responsible and ethical.
The Political/legal Environment Cont’d
• Organizations must be aware of state
and local laws that influence their
activities.
• The central and local government have
established regulatory agencies to
enforce laws i.e. CCPC, ZRA, NAPSA etc
Business Analysis Models
-Illustrations for PEST Analysis Models

Economic

1.
2.
3.
4.
Purposes:
To find how economic factors may affect
on the business.
Areas to be considered:
Consumer activities, such as spending
patterns
Economic conditions, such as inflation,
unemployment, growth, etc.
Government policies, such as fiscal,
monetary, exchange rates, etc.
The changes in production and labor
market …
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© PhotoDisc
2. Economic Environment
• The economic and competitive forces in the general
environment influence business organizations and
customers' decision and activities.
• The overall state of the economy fluctuates in all
countries.
• The health of the economy influences how much
consumers spend and what they buy.
• Therefore, present-day economic conditions and
changes in economy have a broad impact on the
success of organization
Economic Environment Cont’d
The consumption patterns of their potential
customers are affected by economic forces such as:
 The rate of inflation,
 Interest rests,
 The availability of credit for consumer purchases or investment purposes,
 The rate of unemployment, and
 The size of disposable personal income.
Business Analysis Models
-Illustrations for PEST Analysis Models

Social

1.
2.
3.
4.
© PhotoDisc
Purposes:
To find what competitive advantage a business
may gain by social changes.
Areas to be considered:
Aging population trend, which may increase
services for old people
Birth rate increase, which may affect baby
product markets
Security condition, e.g. increase in crime may
cause a business to increase insurance costs
Pressure groups, such as environmental
groups, local community groups, etc. which
may prevent a business from polluting a
river…
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4. Social/cultural Environment
 Analysis of the social environment is
concerned with understanding the
potential impacts of society and social
changes on a business, its industry and
markets.
 This may include changes in Tastes, fashion, lifestyle,
preferences etc.
Business Analysis Models
-Illustrations for PEST Analysis Models
 Purposes:
To find how new technologies might affect
the business activities.
Technological
 Areas to be considered:
1.
2.
3.
4.
The rate of technological change
The development of IT
The wide use of Internet
The creation of new materials for production …
 Impacts:
All these technological changes will lead to some
effects on the business, such as the product of
the business may be replaced by new products or
its production methods may have become out of
date.
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© PhotoDisc
3.Technological Forces
• The technological environment represents the application of
knowledge based on discoveries in science, inventory and
innovations.
• New technology results in new products and services for
consumers, improved existing products and often lower prices
through the development of more cost-efficient production
and distribution methods.
• Technology affects the types of products that organizations
can offer.
Monitoring the Technological environment
Reasons for monitoring the technological environment include;
 Adopting technology may be the means by which a firm remains
competitive.
• Applying new technology also gives organizations the opportunity to
improve customer service e.g. 24 hours banking due to ATMs.
• New technology can lead to increased productivity and operating
efficiency e.g. CAD and CAM speed up the production process in
manufacturing companies.
International Forces
Environment forces within the international business include:
• Language differences
• Changing currency exchange rates
• Different national laws affecting economic activity, political risks
and stability,
• Tax laws of different nations, and
• Social/cultural differences between nations.
Business Analysis Models
-SWOT Analysis
 What is SWOT analysis?
SWOT analysis involves looking at the internal strengths
and weaknesses of a business and external opportunities
and threats.
It is used to analyze the possible internal advantages and
problems that a business has, and helps determine the
external factors of the business which may affect its
strategy.
A SWOT analysis helps to conduct a quick analysis of a
business’s current position so that it can help the
business to develop or plan a direction of development or
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a proper strategy in future.
Elements of SWOT Analysis
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Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
Strengths
 Good brand image
 Well-known name
 Good reputation
 Cost advantage in production
 High market share
 Confidence in the market
 Customer loyalty or repeat
business
 More advanced technology and
R&D
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© PhotoDisc
Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
Weaknesses
© PhotoDisc
 Ineffective in production
 Falling profit
 Falling sales of the product
 Declining age of the life cycle of a
product
 Poor reputation
 Lack of innovation and change
 Lack of adequate capital or
having some financial problems
 Customers’ losing confidence or
increasing complaints on the
business
 Poor management or inefficient
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organizational structure
Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
 Possible development of new
Opportunities
© PhotoDisc
products
 Expansion into new markets
 Development of a global brand
 Joint –development with other
companies
 Possible growing demand for a
product in the market
 Possible government policies
encouraging the growth of the
business and its certain products
 New sources of profit or income
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Business Analysis Models
-Examples or Illustrations for SWOT Analysis
Models
Changes in law or regulations.
Growing competition from local
Threats
companies
Increasing competition from foreign
competitors
New products developed by other
companies which may replace the
product of the business
Marketing activities or strategies
which will be implemented by
competitors
© PhotoDisc
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Business Analysis Models
-SWOT Analysis
Question for your critical thinking:
Based on the Analysis Model discussed, in 10
minutes, Conduct a brief SWOT analysis on
yourself.
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Business Analysis Models
-SWOT and PEST
Question for your critical thinking:
What are the key differences between
SWOT and PEST models.
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Porter Competitive Model
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry
Rivalry
Strategic Business Unit
Bargaining
Power
of Buyers
Substitute
Products
and Services
Source: Michael E. Porter
“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979
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Figure 3-1
Definitions
New Entrant:
An existing company or a startup that has not previously competed with the
SBU in its geographic market. It can also be an existing company that through
a shift in business strategy begins to compete with the SBU.
Substitute Product or Service:
An alternative to doing business with the SBU. This depends on the
willingness of the buyers to substitute, the relative price/performance of the
substitute and/or the level of the switching cost.
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Industry Rivalry
Likelihood?
• Profit margins.
• Industry growth rate
and potential.
• A lack of capacity to
satisfy the market.
• Competitor
concentration and
balance.
• Diversity of
competitors.
• Existing brand identity.
• Switching costs.
• Exit barriers.
• Fixed costs.
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A Buyer Has Power If:
1. It has large, concentrated buying power that enables it to gain volume
discounts and/or special terms or services.
2. What it is buying is standard or undifferentiated and there are multiple
alternative sources.
3. It earns low profit margins so it has great incentive to lower its purchasing
costs.
4. It has a strong potential to backward integrate.
5. The product is unimportant to the quality of the buyers’ products or services.
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A Supplier Has
Power If:
1.
There is domination of supply by a few companies.
2.
Its product is unique or at least differentiated.
3.
It has built up switching costs.
4.
It provides benefits through geographic proximity to its
customers.
5.
It poses a definite threat to forward integrate into its customers’
business.
6.
A long time working relationship provides unique capabilities.
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Possible Barriers to
Entry
• Major switching costs.
• Economies of scale.
• Limited or restrained
• Strong, established cost
• Large capital expenditure
• Strong, established
• Government policy.
• Proprietary product
access to distribution.
requirements.
• Definite strong
advantages.
brands.
differences.
competitor retaliation.
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Threat of
Substitutes
• Buyer propensity to substitute.
• Relative price/performance of substitutes.
• Switching costs.
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MANAGING
ENVIRONMENTAL
ELEMENTS
Managers have three major options in attempting to
manage environmental uncertainty and its potential
impact:
• 1 Adapt to the existing environmental elements
• 2 Attempt to influence environmental
favorability
• 3 Shift the domain of operations away from
threatening environmental elements towards more
beneficial ones.
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1. Adaptation
The adaptation approach involves changing internal operations and
activities-.to- make the organization more compatible with its
environment.
Four common approaches used by organizations to adapt to
environmental fluctuations are:




Buffering
Smoothing
Forecasting
Rationing
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Adaptation Techniques
Buffering:
The use of buffering involves stockpiling either inputs into or
outputs from a production or service process in order to cope with
environmental fluctuations (demand).
Forecasting:
Forecasting is the systematic effort to estimate future conditions.
For example, grocery stores frequently hire part-time cashiers to
supplement regular staff during busy periods.
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Adaptation Techniques Cont’d
Rationing
Rationing involves providing limited access to a product or service that
is in high demand. For example, many universities and colleges ration
slots for popular programs by establishing program prerequisites.
Rationing has the advantage of allowing the organization to avoid costs
of expanding capacity.
Rationing has the disadvantage of denying a consumer a product or
service, while the organization is forced to turn away potential business.
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2. Favorability Influence
The favorability influence approach involves attempting to alter
environmental elements in order to make them more compatible
with the needs of the organization.
Major methods that the organization use in attempting to
influence significant elements in the environment are:
• Advertising and Public Relations,
• Negotiating contracts, co-opting, establishing
• Joint ventures, joining Trade associations and engaging in
political activities.
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3. Domain Shifts
Domain shifts involve making changes in the mix of products
and services offered.
One major approach is to move out of a current product, service
or geographic area into a more favorable domain.
A second domain shift approach is to expand current domains
through diversification, i.e. the expansion of products and
services offered or the development of new and different
products or services.
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Boundary Spanning
Boundary spanning involves creating roles within the organization
that interface with important elements in the environment.
Examples of boundary spanning roles include:
•
•
•
•
•
•
Salespersons
Purchasing specialists
Personnel recruiters
Admissions officers
Shipping and receiving
Agents, receptionists, scientists and Lawyers.
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Recruiting
• Recruiting involves attracting job candidates who meet the needs of the
organization.
• This tool can be used for environmental influence when organizations
seek job candidates who have a knowledge of and close ties to a
significant element of the environment.
• For example, companies often hire executives from specific companies
because of their environmental knowledge and connection.
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Negotiating contracts
• Negotiating contracts aims at seeking
favorable agreements on matters of
importance to the organization.
• Specific agreements with customers and
suppliers are one common means of creating
environmental favorability,
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Co-opting
• Co-opting is the process of absorbing key members of important
environmental elements into the leadership or policy-making
structure of an organization.
• A common example of co-optation is the addition of key
members of the environment to boards of directors.
• For instance, some universities have prominent individuals on the
council.
• These individuals often help the universities deal more effectively
with environmental elements, particularly in the area of raising
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funds from business.
Trade Associations
• Trade associations are organizations composed of
individuals or firms with common business concerns.
• Because they represent the pooled resources of many
organizations, trade associations are frequently in an
enhanced position for conducting public relations
campaigns affecting favorability of the environment
within which their members operate
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Political Activity
• The use of political activity involves attempts
by organizations to enhance their competitive
Situation.
• This is achieved through influencing the
legislator or the behavior of government
regulatory agencies.
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Questions?
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