External Environmental Analysis & Forecasting

Unit 2
EXTERNAL ENVIRONMENTAL ANALYSIS & FORECASTING

Components of Remote Environment

A firm’s external environment consists of all the conditions and forces that affect its strategic options but are typically
beyond the firm’s control. External environment consists of two interactive and interrelated segments: the operating
environment and the remote environment. Where as, the operating environment refers to the forces and conditions
within a specific industry, external to the firm, that influence the selection and attainment of alternative
objective/strategy combinations. Changes in the operating environment often result from actions taken by the firm or
its competitors, consumers, users, suppliers, and/or creditors. Thus, a consumer shift toward greater price
consciousness, a new entrant into the market place, or the development of a substitute product, are all likely to have
direct and intentional positive or negative effects on a firm.

The remote environment refers to forces and conditions that originate beyond and usually irrespective of any
single firm’s immediate operating environment and provide the general economic, political, social, and technological
framework within which competing organizations operate. For example, a company’s strategic planners and managers
may face spiraling inflation (economic), import restrictions on raw materials (political), demographic swings of
population in the geographic areas they serve (social) or revolutionary technological innovations that make their
production systems unexpectedly absolute (technological).

Economic Factors:

Economic considerations refer to the nature and direction of the economy in which the business operates. An
organization must consider general economic condition, economic conditions of different segments of the population,
their disposable income, purchasing power, trends in income distribution, consumption patterns, current income,
market price, availability of credit, saving etc.

Rate of growth in economy, rate of inflation, behavior of capital market, interest rates, exchange rates, tax
rates, price of materials, price of energy and the condition of labor market are additional economic factors that must be
carefully considered while analyzing economic environment. All these factors have an impact on the business
activities. For example, increase in interest rate means high saving which leads towards less expenditure on major
home appliances.

The economic policy of the government has very much impact on business. Some types of business are
favorably affected, some adversely affected, while it is neutral in respect of others. For example, a policy for restriction
to register the two stroke bike in Kathmandu valley may favorably help the four stroke bike dealers. Similarly, the
liberalization of the textile import policy may create difficulties for textile industries of Nepal.

Some of the important economic factors influencing business decisions are economic system (capitalism,
socialism, communism), stage of business cycle (prosperity, recession, depression, recovery), economic policies
(industrial, monetary, and fiscal), economic trend (inflation and deflation), economic planning (annual budget, 5 years,
10 years plan), employment level (unemployment, semi-employment, and employment), infrastructure development
(bank, transportation, public utility), productivity (agricultural and industrial), and factors of production used.

A system of capitalism stresses the philosophy of individualism i.e. individual ownership, individual
expression, consumer choice and free market. Under communism system, all private properties are abolished by the

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state. The system of socialism stands in between capitalism and communism, which bears the strong points of both
philosophies and avoids their weakness. Because of this reason, it is called as mixed economy.

Apart from these, the potential economic impact of international forces appeared to be severely restricted
and was largely discounted. However, the emergence of new international power brokers has changed the focus of
economic environmental forecasting. Three prominent examples of these new influences are the European Economic
Community (EEC), the Organization of Petroleum Exporting Countries (OPEC), and Coalitions of Lesser-developed
Countries (LDC).

OPEC is among the most powerful international economic forces in existence today in terms of its impact on
the United States. This cartel includes most major world suppliers of oil and gas, and its drastic increases in the price
of energy supplied not only impeded U.S. recovery from the recession of the early 1970s but also fueled inflationary
fires the world over. The U.S. automobile industry was particularly affected through an increase in user costs and the
legislated redesign of engine sizes and performance standards. In this way, companies must try to forecast major
repercussions of actions taken in both the domestic and international economic arenas. Such forecasts are a critical part
of the strategic management process.

Political-Legal Factors:

The direction and stability of political factors is a major consideration for managers in formulating company strategy.
Political constraints are placed on each company through fair-trade decisions, antitrust laws, tax programs, minimum
wages legislation, pollution and pricing policies, and many other actions aimed at protecting the consumer and the
environment. These laws, practices, and regulations are most commonly restrictive, and as a result, they tend to reduce
a firm’s potential profits. However, other political actions are designed to benefit and protect a company. Examples
include patent laws, government subsidies, and product research grants. Thus, political forces are both a limitation and
a benefit to the firm they influence.

Many country of the world pass the different rules, regulations and laws to regulate and control the business
enterprises. The communist countries have a centrally planned economic system. Under the rule of the communist
government, the state owns all the means of production, determines the goals of production and controls the economy
according to the central policy. There is no consumer sovereignty and free market economy. The consumption pattern
is dictated by the state.

Most of the countries enforce to write down the statutory directive on the back aging of cigarettes as,
“Cigarette smoking is injurious to health”. The government of Germany restricts to use the superlative word on
advertisement like ‘best’ or ‘excellent’. In India, advertisement of alcoholic liquor is prohibited. Similarly, in Europe,
the use of children in commercial advertisement is restricted by the government.

Changes in government policies, rules, regulations, attitudes and political stability, strengths on opposition
etc. directly impact in business. The create opportunities as well as threats. Therefore, the manager of corporate
business must analyze these factors before carrying out any decision.

Socio-Cultural Factors:

Socio factors involve the beliefs, values, attitudes, opinions, and life-styles of those in a firm’s external environment,
as developed from their cultural, ecological, demographic, religious, educational, and ethnic conditioning. Social
forces are dynamic with constant change resulting from individual’s efforts to control and adapt to environmental
factors to satisfy their desires and needs.

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One of the most profound social changes in recent years is the large number of women entering the labor
market. Not only have women affected the hiring and compensation policies and resource capabilities of the
employing them, they have also created demand for a wide range of products and services necessitated by their
absence from the home. Businesses that correctly anticipated this fact have profited by offering such products and
services as convenience foods, microwave ovens, and day-care centers.

A second accelerating social change is consumer and employee interest in quality-of-life issues, even at the
expense of greater affluence. As a result, increased salaries have been worker preferences for such benefits as
sabbaticals, flexible hours or four-day work weeks, lump-sum vacation plans, and opportunities for advanced training.

Some of the important socio-cultural factors are demographic factors (age, sex, family life cycle, education,
occupation, religion, ethnic background, social class, life style, personality etc.), social norms (attitudes, values,
expectations, customs, belief, ritual, and practices), social concern (pressure group, consumerism, corruption etc.),
population indices (birth rate, migration etc.), career expectations, role of women, quality of life, and views towards
others.

Translating social changes into forecasts of business effects is a difficult process at best. Nevertheless,
informed estimates of the impact of such alterations as geographic shifts in populations and changing work values,
ethics, and religious orientation can only help a strategizing firm in its attempts to prosper.

Technological Factors:

Technological factors include inventions and techniques which affect the way of doing i.e. designing, producing and
distribution of products. Technological environment is fast changing environment of the business. Technological
elements relate to the knowledge applied, material, and machines used in the production of goods and services. There
are three implications of technological change. First, it can affect the relative competitive cost position within the
business. Second, it can create new markets and new business segments. Last, it can collapse or merge previously
independent business by reducing or eliminating their segment cost barriers.

The new technology may result in the development of entirely new products or new uses of existing
products, changes in processes of production and thus influence significantly in the production line, production quality,
scale of production, and cost structure of business enterprise3s. Therefore, it is probably impossible to survive if a firm
is unable to cope with the technological changes.

Some of the important factors operating in the technological environment are – total governmental spending
for research and development, creation of technology, focus of technological efforts, pace of technological change,
patent, trademark protection, new product development trend, technology transfer, and availability of technology and
its cost.

Linking Strategy with Ethics and Social Responsibility

Ethics are moral principles or beliefs about what is right or wrong. Business ethics comprises the moral principles and
standards that guide behavior in the business world. Business organizations are criticized for their illegal means to gain
competitive advantage. Business firms develop strategies merely for their sake, not for others. Thus, ethical issues are
becoming increasingly complex than ever before.

Social responsibility is the obligation to pursue those policies, to make those decisions, or to follow those
lines of action which are desirable in terms of the objectives and value of the society. A business firm should always be

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responsible towards its stakeholders such as consumers, shareholders, employees, government, and society. But a
manager, who acts responsibly by cutting the price of the firm’s product to prevent inflation or by making expenditures
to reduce pollution, or by hiring the hard-core unemployed, is spending the shareholder’s money for a general social
interest. Even if the business person has shareholder permission, he is still acting from motives other than economic
and may, in the long-run, harm the very society the firm is trying to help. By taking on the burden of these social costs,
the business becomes less efficient. This result negatively affects the long-term efficiency of a business. Therefore,
there is one and only one social responsibility of business –to use its resources and engage in activities designed to
increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free
competition without fraud.

Social responsibility of business can be categorized into four types. The economic responsibilities to
business are to produce goods and services that society wants at reasonable prices and to satisfy its obligations to
investors. Legal responsibilities are to obey relevant national laws and regulation. Ethical responsibilities include
meeting societal expectations. Finally, voluntary responsibilities are additional behavior and activities that society
finds desirable.

Now, it is obvious that business organizations have so many ethics to follow and social responsibilities to
fulfill. On the same time, every business firm has to design its strategic plans in such a way to survive and
continuously grow in long-run. Nevertheless, the strategy maker, while formulating corporate strategies, has to
consider ethical issues and social responsibilities of the organization towards its stakeholders. The successful
executives always go on keeping these issues in their minds and complete their job at the same time.

The End

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