EGE UNIT 2- 2.

2
External Environment: Analysis Economic, Social and
Technological and Competitive factors

1. What Is the Environment?

For any organization, the environment consists of the set of external conditions and forces
that have the potential to influence the organization. In the case of Subway, for example, the
environment contains its customers, its rivals such as McDonald’s and Kentucky Fried
Chicken, social trends such as the shift in society toward healthier eating, political entities
such as BJP or Congress, and many additional conditions and forces.

It is useful to break the concept of the environment down into two components. The general
environment (or macroenvironment) includes overall trends and events in society such as
social trends, technological trends, demographics, and economic conditions. The industry
(or competitive environment) consists of multiple organizations that collectively compete
with one another by providing similar goods, services, or both.

Every action that an organization takes, such as raising its prices or launching an advertising
campaign, creates some degree of changes in the world around it. Most organizations are
limited to influencing their industry. Subway’s move to cut salt in its sandwiches, for
example, may lead other fast-food firms to revisit the amount of salt contained in their
products. A few organizations wield such power and influence that they can shape some
elements of the general environment. While most organizations simply react to major
technological trends, for example, the actions of firms such as Intel, Microsoft, and Apple
help create these trends. Some aspects of the general environment, such as demographics,
simply must be taken as a given by all organizations. Overall, the environment has a far
greater influence on most organizations than most organizations have on the environment.

2. Why Does the Environment Matter?

Understanding the environment that surrounds an enterprise is important to the

entrepreneurs. There are several reasons for this. First, the environment provides resources
that an organization needs in order to create goods and services. In the 17th century, British
poet John Donne famously noted that “no man is an island.” Similarly, it is accurate to say
that no organization is self-sufficient. As the human body must consume oxygen, food, and
water, an organization needs to take in resources such as labor, money, and raw materials
from outside its boundaries. Subway, for example, simply would cease to exist without the
contributions of the franchisees that operate its stores, the suppliers that provide food and
other necessary inputs, and the customers who provide Subway with money through
purchasing its products. An organization cannot survive without the support of its
environment.

Second, the environment is a source of opportunities and threats for an

enterprise. Opportunities are events and trends that create chances to improve an
organization’s performance level. Example: When I say ‘sandwich’, the image created in your
head would probably be that of 2 square slices of bread with filling between them. An oval
loaf with all sorts of veggies and sauces can also be a sandwich was a foreign concept in
India. The year 2001, marked a significant milestone for Subway, as it entered Indian fast-
food market with its first franchise in Saket, New Delhi. It wasn’t the first American brand to
enter India; McDonalds and Coca-Cola, among others, had already done it. But this was the
first brand that made fast food healthy and motivated individuals to “Eat Fresh”.

Threats are events and trends that may undermine an organization’s performance. Subway
faces a threat from some upstart restaurant chains. Saladdays, for example, offers a variety
of salads that contain fewer than 500 calories. This firm is much smaller than Subway, but
it could grow to become substantial threats to Subway’s positioning as a healthy eatery.

Entrepreneurs must also realize that virtually any environmental trend or event is likely to
create opportunities for some organizations and threats for others. This is true even in
extreme cases. In addition to horrible human death and suffering, the March 2011
earthquake and tsunami in Japan devastated many organizations, ranging from small
businesses that were simply wiped out to corporate giants such as Toyota whose
manufacturing capabilities were undermined. As odd as it may seem, however, these tragic
events also opened up significant opportunities for other organizations. The rebuilding of
infrastructure and dwellings requires concrete, steel, and other materials. Japanese concrete
manufacturers, steelmakers, and construction companies are likely to be very busy in the
years ahead.

Third, the environment shapes the various strategic decisions that entrepreneurs make as
they attempt to lead their organizations to success. The environment often places important
constraints on an organization’s goals, for example. A firm that sets a goal of increasing
annual sales by 50 percent might struggle to achieve this goal during an economic recession
or if several new competitors enter its business. Environmental conditions also need to be
taken into account when examining whether to start doing business in a new country,
whether to acquire another company, and whether to launch an innovative product, to name
just a few.

3. The Elements of the General Environment: PESTEL Analysis

An organization’s environment includes factors that it can readily affect as well as factors
that largely lay beyond its influence. The latter set of factors are said to exist within the
general environment. Because the general environment often has a substantial influence on
an organization’s level of success, entrepreneurs must track trends and events as they evolve
and try to anticipate the implications of these trends and events.

Figure 3.3: PESTEL

PESTEL analysis is one important tool that entrepreneurs can rely on to organize factors
within the general environment and to identify how these factors influence industries and
the firms within them. PESTEL is an anagram, meaning it is a word that created by using
parts of other words. In particular, PESTEL reflects the names of the six segments of the
general environment: (1) political, (2) economic, (3) social, (4) technological, (5)
environmental, and (6) legal. Wise entrepreneurs carefully examine each of these six
segments to identify major opportunities and threats and then adjust their firms’ strategies
accordingly (Figure 3.3 “PESTEL”).

P Is for “Political”

The political segment centers on the role of governments in shaping business. This segment
includes elements such as tax policies, changes in trade restrictions and tariffs, and the
stability of governments (Figure 3.4 “Political Factors”). For instance, Governments have the
authority to alter tax rules as well as legislation pertaining to social responsibility, labour
laws, environmental sustainability, and other areas of corporate operations. The general ease
of conducting business may be impacted by an increase in compliance standards.
Governments frequently start these adjustments in reaction to problems that develop in other
sectors. For instance, in recent years, global warming has emerged as a crucial social and
political issue. Stricter emission standards are being enforced by governments all around the
world, which has an impact on how automakers design and construct their vehicles. Supply
chains and other ancillary industries may be impacted as a result.

Figure 3.4 Political Factors

Example of political environment on Indian Economy is that due to Political stability and
central government’s attitudes towards business, industry and employment, has attracted
many national and international business entrepreneurs to invest in India.

E Is for “Economic”

The economic segment centers on the economic conditions within which organizations
operate. It includes elements such as interest rates, inflation rates, gross domestic product,
unemployment rates, levels of disposable income, and the general growth or decline of the
economy (Figure 3.5 “Economic Factors”). The economic crisis of the late 2000s has had a
tremendous negative effect on a vast array of organizations. Rising unemployment
discouraged consumers from purchasing expensive, nonessential goods such as automobiles
and television sets. Bank failures during the economic crisis led to a dramatic tightening of
credit markets. This dealt a huge blow to home builders, for example, who saw demand for
new houses plummet because mortgages were extremely difficult to obtain.

Figure 3.5 Economic Factors

Some businesses, however, actually prospered during the crisis. Retailers that offer deep
discounts, such as Walmart, enjoyed an increase in their customer base as consumers
sought to find ways to economize.

Example of economic factor: A rise in the disposable income of people due to a decrease in
tax rates in a country creates more demand for products.
S Is for “Social”

A generation ago, ketchup was an essential element of every American pantry and salsa was
a relatively unknown product. Today, however, food manufacturers sell more salsa than
ketchup in the United States. This change reflects the social segment of the general
environment. Social factors include trends in demographics such as population size, age,
and ethnic mix, as well as cultural trends such as attitudes toward obesity and consumer
activism (Figure 3.6 “Social Factors”). The exploding popularity of salsa reflects the increasing
number of Latinos in the United States over time, as well as the growing acceptance of Latin
food by other ethnic groups.

Figure 3.6 Social Factors

Social Environment consists of social forces like traditions, values, social trends, level of
education, the standard of living etc. All these forces have a vast impact on business.
• Tradition: It refers to social practices that have lasted for decades, such as Ugadi,
Deepavali, Id, Christmas,etc.,
• Impact: More demand during festivals provides opportunities for various businesses.
 • Values: It refers to moral principles prevailing in the society, such as Freedom of
choice in the market, Social Justice, Equality of opportunity, Non-discriminatory
practices etc.
• Impact: The organisations that believe in values maintain a good reputation in society
and find ease in selling their products.
• Social Trends: It refers to a general change or development in the society, such as
health and fitness trend among urban dwellers.
• Impact: Health and fitness trend has created demand for gyms, mineral water etc.

T Is for “Technological”

It consists of scientific improvements and innovations which provide new ways of producing
goods, rendering services, new methods and techniques to operate a business. It is very
important for a firm to understand the level of scientific achievements of a particular economy
before introducing its products. Technological compatibility of products also drives the
demand for manufactured products by a company.

Example: E-commerce has changed the scenario of doing the business, buying goods
and availing services at the click of a mouse or through mobile, Digital India initiative by the
government and move towards a paperless society.

E Is for “Environmental”

The environmental segment involves the physical conditions within which organizations
operate. It includes factors such as natural disasters, pollution levels, and weather patterns
(Figure 3.10 “Environmental Factors”). The threat of pollution, for example, has forced
municipalities to treat water supplies with chemicals. These chemicals increase the safety of
the water but detract from its taste. This has created opportunities for businesses that
provide better-tasting water. Rather than consume cheap but bad-tasting tap water, many
consumers purchase bottled water. Indeed, according to the Agriculture and Agri-Foods
Canada, bottled water amounts to 10.9 percent of the market share of Canadian non-
alcoholic beverage market.
 Figure 3.10 Environmental Factors

As is the case for many companies, bottled water producers not only have benefited from the
general environment but also have been threatened by it. Some estimates are that 80 percent
of plastic bottles end up in landfills. This has led some socially conscious consumers to
become hostile to bottled water. Meanwhile, water filtration systems offered by Brita and
other companies are a cheaper way to obtain clean and tasty water. Such systems also hold
considerable appeal for individuals who feel the need to cut personal expenses due to
economic conditions. In sum, bottled water producers have been provided opportunities by
the environmental segment of the general environment (specifically, the spread of poor-
tasting water to combat pollution) but are faced with threats from the social segment (the
social conscience of some consumers) and the economic segment (the financial concerns of
other consumers).
L Is for “Legal”

The legal segment centers on how the courts influence business activity. Examples of
important legal factors include employment laws, health and safety regulations,
discrimination laws, and antitrust laws (Figure 3.11 “Legal Factors”).

Intellectual property rights are a particularly daunting aspect of the legal segment for many
organizations. When a studio such as Pixar produces a movie, a software firm such as Adobe
revises a program, or a video game company such as Activision devises a new game, these
firms are creating intellectual property. Such firms attempt to make profits by selling copies
of their movies, programs, and games to individuals. Piracy of intellectual property—a
process wherein illegal copies are made and sold by others—poses a serious threat to such
profits. Law enforcement agencies and courts in many countries, including the United States,
provide organizations with the necessary legal mechanisms to protect their intellectual
property from piracy.

Figure 3.11 Legal Factors

In other countries, such as China, piracy of intellectual property is quite common. Three
other general environment segments play a role in making piracy a major concern. First, in
terms of the social segment, China is the most populous country in the world. Second, in
terms of the economic segment, China’s affluence is growing rapidly. Third, in terms of the
technological segment, rapid advances in computers and communication have made piracy
easier over time. Taken together, these various general environment trends lead piracy to be
a major source of angst for firms that rely on intellectual property to deliver profits.