Analysis of External Environment of Business
• Strategies are not and should not be developed in
• They must be responsive to the external
environment of business.
• The managers must be aware of what’s going on
outside their company.
• If the firm focus only on internal environment, they
may be efficient producers of goods or services but
not for the market.
• Many high-tech companies fail mainly because of
their inefficiency to cope with the changes that is
happening in the environment
Analysis of External Environment of Business
• So a manager must be able scan the environment and
forecast the environmental variables so as to create an
environmentally aware organization.
• Managers can become environmentally aware by following
three important processes as given below:
• This involves surveillance of a firm’s external environment
so as to enable the firm to predict external environmental
changes and detect those changes which is already
• The environment of business is broadly classified as Micro
Environment and Macro Environment.
• The micro environment or direct environment consists of
those environmental variables which are very closed and
directly related to business. This comprises of suppliers,
distributors, customers, governmental agencies, pressure
groups etc. which is generally called as stakeholders in
• The macro environment consists of broad spectrum of
factors that are general in nature but affect and get affected
Components of General Environment
• The Demographic Segment
• Demography is the study of population and its
• The major such characteristics that affect business
are population size, age composition of the
population, literacy levels, inter-state migration,
rural-urban mobility, income distribution etc.
• For example, the growing number of senior citizens
in a country can affect the general business.
E.g. Aging Population in Japan
• Old age could be a fountain of trouble for
• Respect for the Aged Day is symbolic of
the respect that is afforded to the elderly in
Japan. But with one in four of its
population aged 65 or over, the country is
facing what experts suggest is a
demographic time bomb.
Example: Aging Population in Japan
• Taro Aso, the finance minister, said on Monday that the
elderly should be allowed to "hurry up and die" to relieve
pressure on the state to pay for their medical care.
• The aging of Japan is thought to outweigh all other
nations, as the country is purported to have the highest
proportion of elderly citizens; more than 24% are aged
65 or above, as of 2012
• According to the health ministry, there were 153
centenarians in Japan in 1963, when the survey began.
While it took 35 years to top 10,000 in 1998, the number
has grown rapidly since, surpassing 30,000 in 2007 and
50,000 last year.
(Think about the impact on business due to aging population)
Aging Population in Japan
• Politics has a serious impact on the economic environment
of a country.
• Political ideology and political stability or instability strongly
affect the pace and direction of economic growth
• This also influence the economic environment of a country.
For example, the new government in India in 1991, opened
up the economy through various economic measures that
really changed the face of the economy.
• Certain political philosophy affect the business adversely as
Coca Cola and IBM had to move out of India due to the
policies of the Janata Government during late 1970s.
• The major political factors that influence
1. Government stability
2. Political values and beliefs shaping
3. Regulation of trade and business
4. Taxation policies of the government
5. Priorities in social sector
6. Political parties and trade unionism
Political Environment – Corruption at Government Level
and Impact on Economy : Black Money
• In a country like India, it is said that dishonest industrialists,
scandalous politicians and corrupt IAS, IRS, IPS officers have
deposited in foreign banks in their illegal personal accounts a sum
of about $1500 billion, which have been misappropriated by them.
This amount is about 13 times larger than the country's foreign debt.
With this amount 45 crore poor people can get Rs 1,00,000 each
• TOP FIVE IN BLACK MONEY IN SWISS BANKS
• INDIA $1,456 BILLION
• RUSSIA $470 BILLION
• U.K. $390 BILLION
• UKRAINE $100 BILLION
• CHINA $96 BILLION
(Think : Impact of Political Environment on
Economic Environment of Business)
• Economic factors give guidelines on the
nature and direction of the economy in
which the firm operates.
• The firm must frequently scan and monitor
the economic trends in a country.
• For example, the trend of price changes
(inflation), FDI flow, economic fluctuations
etc are very important factors that
determined the fate of a firm in a market.
• The common economic indicators are:
Capital Market and Money Market
Prices, Wages and Productivity
Balance of Payment Position & Foreign Trade
THINK : MONEY SPEND ON MAINTAINING PRISONS
AND ITS IMPACT ON BUSINESS
• Socio cultural factors influence the values, beliefs, and
lifestyles of a society.
• For example, a higher percentage of women in the
workforce, dual income families, increase in number of
temporary workers, greater concern for healthy diets and
physical fitness etc influence business
• Culture and business is closely interrelated in the sense
that when a new business starts, it will be based on the
concept of cultural adaptation.
• Once the product or service is accepted, the company
will go for cultural transformation.
THINK: INFLUENCE OF
CULTURE ON DOING
BUSINESS IN CHINA
• Technological factors represent major opportunities and
threats which must be taken into account while formulating
• Technological change can influence an organization’s
products, services, suppliers, distributors, competitors,
customers, manufacturing process, marketing practices
and competitive position etc.
• Technological changes can reduce or eliminate cost
barriers between businesses, create shorter production
runs, create shortages in technical skills and result in
changing values and expectations of customers and
• Certain technological factors that influence
2. Process innovation
3. Digital revolution
4. Government spending on research
5. Speed of technology transfer
6. Rate of obsolescence
7. Development in information technology
IMPACT OF GENETIC
MODIFICATION ON BUSINESS
• The impact of business on environment is
a major concern now globally.
• The issue has gained the attention of
governments globally as the impact of
business has negatively affected
environment in many countries of the
• This forced many companies to take up
Corporate Social Responsibility (CSR)
• The major environmental issues are:
– Sustainable development of raw materials
ADVERSE IMPACT OF
• Legal factors have got substantial impact on business,
both positively and negatively
• Governments introduce rules and regulations for
controlling business activities along with supporting
• The major legal issues pertain to the following in many
1. Licensing policies
2. Quota restrictions
3. Import duties
4. Forex regulations
5. Restriction on FDI flow
6. Control on distribution and pricing
THINK: LAWS CONTROLLING BUSINESS
AND SUPPORTING BUSINESS
• Careful analysis of the factors given in the
earlier slides will help you in identifying the
environmental factors that affect your
• The above information can be analyzed
and recorded with the help of PESTEL
framework, which is a popular tool used
for assessing the impact of business
• These external forces affect the consumer
demand for the product, that products that
are produced by companies, the nature of
positing the products or services etc.
• So it is imperative for organization to
identify OPPORTUNITIES and THREATS
that is posed by the environmental factors.
GRID FOR PESTEL ANALYSIS
• Consider the factors that influence your
• Plot it horizontally in the grid
• Consider the individual factors that govern
your business and its success or failure
• Analyze the impact of environment on your
business so that steps can be taken to
overcome the weaknesses and thereby
improve the strengths
PESTEL ANALYSIS GRID
PESTEL ANALYSIS GRID
• Consider both positive factors and
negative factors that has got impact on
• Give weights to negative and positive
factors. For negative factors, give negative
sign and positive factors given positive
• Think about ways that can help to reduce
the impact of negative factors and improve
the effect of positive factors
PESTEL ANALYSIS GRID
• For analyzing the effect of negative factors and positive factors, use
FORCE FIELD ANALYSIS.
• Force Field Analysis was created by Kurt Lewin in the 1940s.
• Lewin originally used the tool in his work as a social psychologist.
Today, however, Force Field Analysis is also used in business, for
making and communicating go/no-go decisions.
• You use the tool by listing all of the factors (forces) for and against
your decision or change. You then score each factor based on its
influence, and add up the scores for and against change to find out
which of these wins.
• You can then look at strengthening the forces that support the
change and managing the forces against the change, so that it's
Force Field Analysis (Refer Material on
Force Field Analysis)
• For making force field analysis, ask the following
questions to yourself.
• What business benefit will the change deliver?
• Who supports the change? Who is against it? Why?
• How easy will it be to make the change? Do you have
enough time and resources to make it work?
• What costs are involved?
• What other business processes will be affected by the
• What are the risks?