The External Business Environment

The External Business Environment

Hey everyone. This is Matt from Alanis Business
Academy. In this lesson, we’re going to talk about the external business environment.
And this topic I actually gave a lecture on a few days ago in my Intro to Business class,
and thought I’d take the opportunity to update some of the resources we have related
to this topic. We do have a few videos available on the external business environment. They
were done a few years ago, and frankly with some older technology that we had at the time.
So I thought I’d take this time to update that and give us a brand new video and that
sort of thing. So hopefully you find the information valuable of course. So lets start by going into what is the external
business environment. Frankly, the external business environment is anything outside of
the control of a business of some kind, that has the potential to affect it in some way.
So we operate under the assumption, as individuals but also as individuals, we can control very
little. There’s a lot that happens outside of our controls, so the mindset then shifts
to well if I can’t necessarily control these things the best that I can do is try to pay
attention, and predict them. And if I can potentially predict them, then adapt to them
obviously before they become an issue to where they’re negatively affecting my business.
And that really is the goal, to try to make some changes so that we’re not necessarily
caught flat footing and we can make those adjustments. So whether it be a change in
price or whether it’s a competitive doing something that can potentially affect our
business. If we have some type of idea that can potentially happen, then we can take some
actions necessarily to try to lessen the impact of it. That’s really the goal here. Not
trying to change or prevent these trends from happening. But if we can at least anticipate
them, trying to adapt to them before them. And if they’re opportunities, then obviously
trying to leverage those as well and we’ll talk a little bit about that once we get a
little further along here. So the first thing that we need to do is talk
about the different environments, almost like sub-environments within the external business
environment. And obviously we’re talking about anything outside of the control of the
business, but that’s pretty vague and general. And so it becomes very difficult to try and
analyze everything that could potentially affect your business. So what we’ve done,
is we separate these into six environments just for the purpose of doing research so
we can make sure and consider some really important things here. The first of those,
and this is really in no apparent order. I’ll go ahead and list them first and we’ll go
ahead and talk about them a little bit. Is the economic environment, we have the social
environment, the technological environment, the competitive environment, the political-legal
environment, and lastly the global environment. So these are six environments altogether,
each of which has the potential to impact the business in some way. So, lets go through
and talk about each of these. I’ll give you kind of a quick definition, at least in
terms of that way that I would describe it. And I’ll give you an example of a change
or a trend that could be important to some businesses. Maybe not all businesses because
remember we’re talking about a businesses unique external business environment. So although
there might be some factors, like the economy, that affects all businesses in a pretty similar
way. It still doesn’t affect them in an identical fashion if that makes sense. So lets first talk about the economic environment.
When I say economic environment, what I’m referring to is the condition of the economy
where the business primarily operates. So wherever the business primarily derives its
revenues, we’re talking about the condition about that economy. So if we have a business
that primarily operates in the United States, and that’s way a bulk of its revenues are
derived from the the United States economy would be its economic environment. And so
what we’re really concerned about here is the health and condition of that economy.
So really the key question is how are consumers doing in the economy? We want to know what
are their habits, what are their purchasing habits. But also what are things like unemployment?
What is GDP? You know we’re looking at economic metrics to get sense for the health for the
consumer. Because as you know, a majority of the growth in the economy is derived from
consumer spending. So if consumers aren’t spending money then that will affect the health
of the economy. If consumer’s wages have been declining or inflation is continuing
to rise. That could potentially affect consumer purchasing power. It affects that amount of
money that consumer’s have in their possession. Which will mean that their less likely to
purchase certain goods and services. Right? Kind of stick to necessities. And we saw this
happen in the latest recession in 2008-2009, where people really did start to buckle down
on saving. Try to eliminate debt, because they were just concerned and fearful for what
the future was going to hold. And so those are things that as a business you would want
to pay attention to, especially if your consumer is suffering rather significantly. Even in
recessions, even in difficult economic times not everyone suffers that same way. So you
need to understand what your consumers is and how they’re doing financially. But unfortunately
if you’re not paying attention to what is going on in the economic environment, then
you might be creating products that consumers don’t have a need for at that point in time.
Maybe they’re outside of the price range that consumers can afford at that point in
time. So those are important things to consider in that particular area. Now the next environment is the social environment.
The social environment includes changes in demographics, in consumer preferences, interests,
and even lifestyles within a particular society. And so, like all things, from a business perspective
we’re looking for potential changes or trends that might lead to some sort of advantage
if I can potentially leverage. So a couple of things to consider here in this area. The
first thing is there has been a significant trend towards trying to having a healthier
lifestyle. Overall this is a good trend. From a societal standpoint we generally want people
who are healthier because that affects ultimately healthcare costs and those types of things.
It’s better to have a healthier society versus the exact opposite. So that’s certainly
a good thing. And we’ve seen opportunities as a result of that. So as people desire to
eat healthier we’ve seen businesses adapt to that to try to leverage that particular
opportunity. So this includes everything from portion control, where we’ve seen a lot
of businesses that are now lessening the amount of food that they include. Whether that’s
pre-packaged, whether that’s on a restaurant menu. We’ve seen those kind of light options
if you will. And those are as a direct result of trying to cater to consumers that want
healthier options. We’ve seen companies like McDonalds who have historically been
known for kind of being the opposite of a healthier lifestyle, even start to adapt their
offerings in an attempt to cater towards a different consumer. Now regardless if that’s
effectiveness or not from McDonalds standpoint, you certainly can argue that they’re trying
to cater towards this healthier lifestyle. So those are things that you would look for.
In changing demographics, one that is particularly kind of significant now, at least in the U.S.,
is obviously the baby boomers who are continuing to age and getting close to retirement. That
is a significant opportunity as well, and as we’ve talked about before that creates
opportunities for different services related to retirement homes and other things that
are a necessity as people get older. Especially as you have a large number of people that
are getting older and in a similar time frame as well. Now the next thing is the technological environment.
And the technological environment involves changes in technology that can potentially
add value to consumers. So from a business perspective, what I’m looking at here, is
for a change in technology that will allow me the provide a product or service that can
help people essentially. I mean that’s really, at its core, a function of a business is to
provide value and if they’re not providing value then ultimately that’s going to affect
the success of the business. So let me give you a couple of examples to talk about some
changes with regards to technology and how thats affected the environment and how we’ve
seen. And so, one of those changes first that I’ll mention is with regards to digital
books. This is now so much of a recent trend so much, as the mid-2000s, but some companies
were able to leverage this change rather successfully. While others weren’t necessarily. So the
companies that I’ll name are one being Amazon and other being Borders. Amazon as well know
started off selling physical books solely and has since branched out into every possible
item that you purchase. But was originally a big pioneer behind this digital books technology.
They came out with the Kindle in the mid-2000s, and were really one of the early adopters
even when a lot of businesses didn’t think that digital books would really be that big
of a deal. I mean why would you want a physical book in your possession? Or why would you
want a digital book rather? Why wouldn’t you want a physical book that you could open,
it has a physical form, you own it and those sorts of things. And that really affected
the extent to which they adopted that particular technology. It was rather late until they
developed their own dedicated e-reader and by that time Amazon already had a dominant
foothold. So those are some changes that Amazon saw and that could potentially be an opportunity
as a way of providing content to people in a way that’s rather convenient. You don’t
have to lug books around, you can carry quite a few in a e-reader or an iPad or some other
tablet. So it provides a great deal of value. The other thing that I’ll mention is with
regards to travel and to car services. Uber is a relatively newer company, I think they
were established in 2010 or 2011 if I’m not mistaken. Personally I really enjoy the
service, I’ve used it a couple of times. Well more than a few. When a travel I typically
use it and its very convenient. If you’re not familiar really how it works, and just
so you know kind of disclaimer I don’t work for them or anything like that. I merely a
very, very happy customer. How the service works just so you know, is you basically sign
online and create account. Store you credit card information within an app. And you actually
use an app to call a car to your current location. If you’re concerned that sounds a little
bit creepy, a photo of the driver shows up. Information on the car they’re driving shows
up. So, you know exactly who to expect to come pick you up. It’s not just some random
personal obviously. So that person shows up, they ask for your destination and they take
you there. And, the payment is all handled behind the scenes. So if you really don’t
like fumbling with you know making sure you have the right bills to go in a taxi. Trying
to hail a taxi cab, which can be difficult defending upon where you are and then standing
outside forever. It really is a rather convenient solution that one, leverages technology in
the form of mobile technology. So we’re obviously getting in that area. But really
enhances and provides value because it’s just so much more convenient now and the experience
of getting a car and traveling from point A to point B is relatively easy. Especially
considering if you’ve had a lot of experience in taxi cabs and fumbling with payments and
figuring all that stuff out. So those would be some examples of changes in terms of technology
and how businesses have used them to provide value to customers. Which is really important.
Once again, going back to well from a business perspective what do we do? Our goal is to
try to anticipate these changes and try to leverage them to provide value. Another environment here within the external
business environment is the competitive environment. Now the competitive environment covers actions
or competitor actions that pose a potential threat to another company. So one of the big
things obviously for many companies is to be aware of what its competition is doing.
Because a number of different things. One of which is if they create a product or service
that could potentially have an affect on your sales or anything related to that, than that
could be very difficult to sustain long-term. So we’ve seen a lot of competition within
that last several years. We’ve seen Apple and Samsung go head to head with regards to
patens in pretty much every geographic area. We’ve seen a number of different companies,
particular Uber and Lyft, which is another car service as well. Not as big in terms of
revenues and financial support, but provides a very similar service. Also in this particular
environment where you have them offering almost identical services and having them come out
with those services at very similar times. In large part that’s because of this competitive
environment. Because they know that if one of them is going to offer that service, it
would really put them at a disadvantage if they weren’t. Especially considering it’s
a relatively new market, so there’s no telling which is going to be successful. And that
last thing that you want is to avoid adopting something, and find out that was really what
consumers wanting and that’s now the flagship product or service for that company. So there’s
a lot of things that are happening here. You go into e-commerce and you start talking about
Amazon and Walmart. Obviously Amazon is the dominant player in e-commerce. There should
be no surprise when I saw that. But then looking at some of the things that Walmart is trying
to do to better compete. You have some of the brick-and-mortar locations that are trying
to leverage their physical stores for distribution. And so those are some things that are happening
in their competitive environment. The key is to be aware of what you’re competition
is doing, which can be difficult because we try to maintain some secret practices obviously.
You don’t want to disclose everything. But being aware of what you’re competition is
doing so that you can make a decision if ultimately it matters. If you need to do anything about
it. Maybe not. But if you do, what does that look like? Is it offering a similar product
or service or merely re-positioning something that you already have. Unfortunately, you
really can’t make that change unless you’re familiar with what’s actually happening
in the competitive environment. The next environment is the political and
legal environment, and this includes any changes or trends with regards to legislation, regulations,
and even court decisions that have the potential to affect the business in some way. We know
that the government does a whole lot. Some of that is maybe good for business, a lot
of it is not necessarily. So we have to be aware of some of things that are potentially
happening that pose a risk to us so that we can adapt accordingly. Obviously it’s really
difficult to affect government policy unless you’re a well-established company with a
lot of money to throw at lobbyists. But most companies don’t have that same ability to
do so. So although we can take issues directly to consumers and hope that they kind of address
grievances and those types of things and swaying legislation that way. It’s not always a
guarantee. So many times we have to adapt to what is already happening. And so one change,
or potential change, that seemed to have some steam early on, and seemed to kind of lose
some of its momentum is the national minimum wage rate. A few years ago this was a very
big issue. President Obama kind of ran on this platform when he was up for re-election
on raising the national minimum wage. Regardless of your opinion of whether or not it would
really provide any benefit long-term, there are two camps of course. But regardless of
that, you can’t argue that it wouldn’t have some type of impact on businesses that
particularly hire low-wage workers. You deal with the increase immediately in your direct
labor costs, which of course you know potentially you pass along to consumers and everything
like that. But that can be a potential change that could pose a risk to your business that
you would have to be aware of so that you can adapt accordingly. And the last environment is the global environment.
Now here we’re focusing on a few different things, but mostly obviously international.
Dealing the international economic conditions, natural disasters, and even political unrest
in a society that spills over and affects your business. We live in a global economy,
so it’s not enough to simply consider what’s happening domestically, but also what’s
happening around the world. Everything from you know how a crisis in the Middle East affects
that price of oil, has the potential to impact businesses in some way, shape, or form. One
of the things thats happened recently within that last few days of this recording is the
conflict within Ukraine and Russia. And potentially, allegedly Russia was sending in equipment
and troops into the Ukraine. The Ukraine apparently fired upon them and caused some damage and
those sorts of things. So if you’re were watching the stock market or the financial
markets those were very much affected by that particular crisis. So something that’s happening
all the way around the world for some people, has the potential to affect what’s happening
back in the U.S. One big even that happened two years ago was the earthquake and subsequent
tsunami over in Japan that caused damage to that nuclear reactor plan. I think it’s
the Fukishima Daiichi power plant if I’m saying that correctly hopefully. That caused
some really significant issues with suppliers. I know for example in certain parts of the
U.S. it was really difficult to get parts for Japanese made automobile because their
were certain parts that were manufactured in Japan in that area that was affected. That
had a big impact on dealerships and body shops being able to get parts to actually repair
vehicles here in the U.S. Once again, something that happens all across the world, but has
the potential to impact people in the U.S. and in other areas in the world as well. So
from a business standpoint, what you need to consider is the probability of something
like that happening, but also attempting to insulate yourself against those threats. So,
you know, maybe you can’t predict when an earthquake is going to happen, but based upon
precedent know that it is a possibility. So what can you do to lessen the impact of such
an event happening? So maybe that’s diversifying suppliers where you have things spread out
between multiple suppliers in different areas. So that if one is negatively affected you
still have operations and can pull supplies from another one. It could be a number of
different things, but obviously you have to start looking at that issue to go ahead an
adapt accordingly. So altogether, these six environments represent
what we call the external business environment. So each of them has some potential impact
on businesses, and it’s up to us to analyze them so that maybe we can identify some opportunities
for new products and services that we hadn’t ordinarily thought of. Or potentially identify
threats that we have to respond to if we’re going to maintain market share and those other
sorts of things. Alright that does it for this video on the
external business environment. Hopefully you found that information to be helpful. If you
want more information feel free to go to Also be sure to sign up for our email list
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And feel free to check out some of our other podcasts and lessons that we have on the webiste
as well. Thanks for watching, and we’ll talk to you soon.

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About the Author: Oren Garnes


  1. Hello Mr Alanis. I have a question regarding the components of the external environment that I have seen in the "Fundamentals of Management Essential Concepts and Applications Eight Edition" textbook which was written by Stephen P. Robbins, David A. DeCenzo and Mary Coulter. According to the book, the six components are economic, global, political/legal, sociocultural, technological and demographic instead of the competitive that you mentioned in the video. May I ask why you did not put demographic as the component of external environment in your video? Great video by the way. Thank you. 🙂

  2. I found your lecture as a key point of the topics been discussed in a brilliant way.keep it up.thank you .

  3. Almost makes me feel that there are little to no negative external factors. You listed mostly postive. Good video tho

  4. I am so much impressed the way you explained; especially the example in each environment. very concise and very absolutely clear. more power to you.

  5. Thanks much .. This was a big help..It would be good if you put references just so that we can see where you are getting your info from

  6. Hi sir first of all thank you for your tutorial really helps a lot. I was searching for " FACTORS AFFECTING GROWTH OF A COMPANY" and was surprised to find none. My guess is that the factors that will affect the growth of an organisation are both the internal and external environment only? Am i right?

  7. External Business Environment (Outside marketer’s control)

    1) Industry
    2) Competitors + Substitutes
    3) Market Segment Data (consumer groups)
    4) Social Trends
    4) Economic environment
    4) Political Environment
    5) Legal and regulatory
    6) technology
    7) Natural environment

    Responses to external business environment:

    Increase costumer value – increase productivity – improve sales leadership

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