Importance of Business External Environment

Importance of Business External Environment

Introduction

Every business irrespective of size and nature has internal as well external environment. The internal environment mainly focuses on operation, finance, supply chain management, Human Resource Management (HRM) and like other methods. These all designs are directly affecting the efficiency and then ultimately the profitability (Papadakis, 1998).. On the contrary, there is the external condition which most of the times is not in the control of management but is impacting the decisions of the business. The external environment includes the legal, political, cultural, technological, economic and environmental issues which are fundamental for the success or failure of business. Managers continuously examine the external environment of business in order to formulate strategic policies (Papadakis, 1998).. There are various tools for managers to collect information regarding the external environment of business. Among them, the notable are the PESTLE, SWOT and Five Factor Analysis. Through these analysts, managers view the “Big Picture” of the external environment. The management of those companies which are working in a turbulent environment is taking more strategic, systematic and challenging decisions. They also take more interest in the external environment of business. In addition, the intensity of problem increases when there is a multinational corporation (MNC). On the other hand, the management of those companies which are working in a peaceful setting is usually taking traditional and formal policy making process. The external environment gives managers an opportunity to assess the risk associated, information of all stakeholders and overall idea of conditions it is operating or going to operate (Freeman, 2010).

Discussion

There is no any denying the fact that every society has different characteristics. So there is no single universal approach which becomes a source of success in every society. Managers of MNCs are striving hard before and after the launch of a company as a business can move with shoulder to shoulder with their competitors (Freeman, 2010). If there are no competitors then managers are trying to capture the Lion's share in the industry and maintain the winning loyalty of customers. Generally, managers are applying SWOT, PESTLE and Five Factor Analysis to understand the external environment.

Porter's Five Forces External Environment

Porter's Five Forces serve as a competitive position model that is simple but powerful tool to assess the industry situation and understand the power in the industry. In fact, the Five Forces Model allows a business to analyze its competitive strength as well as the position the company is intending to gain. Porter's Five Force Model comprises of five strategic elements including threat of entry, bargaining power of supplier, bargaining power of buyer, substitutes and rivalry which are external to business but very important for formulating the strategic policies.

Threat of New Entrants

For a MNC, threat of new entrants always remains high. In profitable segment of the market, there is always risk of entering new firms (Porter, 2008). Managers consider this is as risk because the entrants will share the profit of the ...