The external or outer environment of a business entity is a complex combination of several factors that have a direct impact on the performance as well as functioning of that entity. More often, these factors are linked with global affairs that are not merely challenging to interpret but are also not in their control and so they make the entities a passive player rather than have any kind of participation. It is really challenging to perform in such categorically dynamic environment that raise several threats and opportunities at the same time.
However, many theorists and business experts in the history have come up with tools that help strategists to analyze and explore the outcomes of these changing business environments. The most obvious ones include PEST, PESTEL, PEST-CM and STEEP that look for external factors including Social, Political, Technical, Economic, Legal, Customers, Markets and Environmental. There are three different categories of environment that affect the performance of business entities, these include: operating, industry remote environments.
Now, what are the factors that the extent of these environmental changes depends on? These are speed of change, the changeable tendency of the industry and market environment, nature and situation of competition, technological interference and usefulness, extent of customers’ discretion and political and governmental influences.
Apart from these, there are other significant tools as well that may help us determine and evaluate the external environment. These are BCG Matrix, SWOT, SPACE MATRIX, QSPM, Grand Strategy Matrix, EE MATRIX, IE MATRIX, and Competitive Profile Matrix.
Michael Porter has outlined 5 such forces that design and define the kind of competition to a business and the eventual profitability of the business. These forces:
Threats of new entrants
Threats of substitute products
Bargaining power of buyers
Bargaining power of suppliers
Rivalry among competitions