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External factors affecting Business

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    Most successful business start-ups are owned by believers and proponents of good strategic management, a regimented 7-stage discipline involving vision and mission development, external assessment, internal assessment, long-term objective setting, strategy identification and selection, strategy implementation, and performance evaluation. Well-meaning strategic management practitioners consider five (5) key external forces in doing the external assessment exercise, and these are political, economic, social, technological (PEST), and competitive factors. The scope of external assessment embraces the analysis of opportunities and threats impacting a certain industry or business. The following discusses the key factors covered by an external assessment: 1. Political Factors

    This exercise dissects the political, governmental, and legal aspects of a particular business. Both local and global environments are studied because federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. The growing interdependence among economies, markets, governments, and organizations underscores the importance of considering the political variables affecting the conception, development, and operation of any business. Existing and potential developments bearing on government-driven tax laws, trade quota and restraints, regulatory framework, industry subsidies, investment incentives, local content manufacturing requirements, regulated pricing, trade agreements, economic treaties, and bureaucratic processes are major political realities that must be taken into account when planning for a business. National political stability is also a key consideration. The complexity of today’s political landscape is exactly the reason why strategists now spend more time anticipating and influencing public policy actions. Entrepreneurs make sure that they have more time meeting government officials, attending government-sponsored conferences, rendering public speeches, issuing press releases, and becoming visible in trade groups, industry associations, and other congregations where updated political developments can be learned.

    2. Economic Factors
    Economic analysis, a comprehensive study of national, regional, and global
    economic performance and trends, represents a highly important phase of strategy development for planned, start-up, and growing businesses. Economic factors have direct impact on the potential attractiveness of various business ventures. Economic analysis yields indications on numerous variables such as: shifts in nature of economy (e.g. US shifting to a service economy), availability of credit, level of disposable income, spending propensity of people, interest rates, inflation rates, government deficits, gross domestic product trends, consumption patterns, unemployment trends, foreign currency fluctuations, stock market trends, demand shifts in various products and services in different locations, import and export trade, price indexes, monetary policies, fiscal policies, and tax rates, including economic policies of other countries and the European Economic Community. The U.S and world economies have suffered extended severe distortions. As a result, businesses floundered and resorted to manpower cutbacks, with several thousands of small, medium, and big enterprises forced by economic circumstances to close. The U.S. housing meltdown is a clear example of how adverse economic factors could bring down huge businesses and industries. Millions of displaced employees are now being pushed to become entrepreneurs to make a living, with the United States becoming more entrepreneurial every day. This development reinforces the importance of analyzing economic forces before and during the course of any business. 3. Social Factors

    The social component of strategic analysis relates to assessing the social, cultural, demographic, and environmental profiles of addressable markets. In the U.S., for instance, cultural, demographic, and environmental trends are shaping the way Americans live, work, produce, and consume. America is an aging society, and getting less Caucasian in racial mix. The oldest members of America’s no less than 76 million baby boomers plan to retire in 2011, creating deep concern as to who will pay their social security and Medicare. Americans age 65 and older will rise to 18.5% of the total population by 2025. The U.S. Census Bureau estimates that the number of Hispanics will increase to 15% of the total population by 2021, and will become a bigger minority group than Afro-Americans. More and more Americans move in a population shift to the South and West and away from the Northeast and
    Midwest. Americans are becoming less interested in fitness and exercise. Decimation and degradation of America’s natural environment is the greatest threat to business and society, except for terrorism. World population passed the 6 billion mark, with the U.S. having just about 300 million people; this leaves billions of people outside the U.S. who may be markets for American products. The sample inputs we had just presented typify the kind of information that an analysis of social factors can unravel for anyone who is in business, or who intends to go into it. This information helps pinpoint the segments or niches that need to be specifically served for competitive advantage. 4. Technological Factors

    Technology is a business enabler that has revolutionary impact on the actual conduct of business. It contributes to achieving desired business productivity and efficiency. The Internet serves as a good example; what used to be impossibility in instantaneous global communication has become a cold reality and an urgent necessity for every business in order to succeed. The Internet, including its e-commerce and social networking adjuncts, continues to change the nature of opportunities and threats in business. It alters product life cycles, increases distribution speed, creates new products and services, changes economies of scale, redefines business relationships, and propagates borderless transactions. In short, the Internet has become an indispensable business tool. Another good example of enabling technology application refers to the advancements in superconductivity systems, which increase the power of electrical products by lowering resistance to current. These improvements revolutionize business operations, especially in transportation, utility, healthcare, electrical, and computer industries. Technology, however, is a threat, a disruptive element that can cause monstrous operational problems for businesses that fail to keep pace with technological trends and innovations. This disruptive impact amplifies the essence of evaluating the technology issues surrounding the viability of a business. For example, by combining high technology and low-cost massive manpower, China-based businesses have achieved unprecedented global competitiveness. 5. Competitive Factors

    An equally important part of external assessment is identifying rival firms
    and ascertaining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies. Good competitive intelligence in business, like in the military, remains to be one of the key factors for success. Weaknesses of competitors can signify external opportunities, while major competitive strengths can mean key external threats. The more competitive information is collected, the more it is advantageous for a company as it possesses a good basis for strategies. While collection of competitive information is a difficult task, the Internet has been the leading remedial source for such information. Many strategically-minded companies go to the extent of adopting a responsive competitive intelligence strategy, which is a systematic and ethical process for gathering, processing, and organizing information about competitor’s activities and general business trends to support the attainment of business goals. Competitive intelligence programs seek to provide a general understanding of an industry and its competing players, identify the vulnerabilities of competitors and assess the impact of strategic actions against them, and know the potential competitive moves that can jeopardize a firm’s position in the industry. The outstanding benefits of competitive intelligence include increased revenues, lower costs, and better decision-making. Implementation Prescription:

    Not all companies have the skills, knowledge, and abilities, as well as experience and people, to undertake a no-nonsense external assessment. Under this situation, the simple steps to do the exercise involves 1) identifying the key opportunities and threats under each external factor, 2) identifying internal strengths to take advantage of opportunities and mitigate threats, and 3) improving on internal weaknesses to become strengths or shield the business from threats. If these steps could not be done without serious uncertainties, for good results, seek professional help from those who have solid grounding on strategic management.

    Some another External factors affecting Business

    The global economy is one of the biggest external factors that will, at some
    time, affect your business. Market fluctuations based on politics, terrorism attacks, wars and currency devaluation eventually trickle down to most commercial enterprises. Finance

    Wall Street and the solvency of big banks and financial institutions may not seem to have much to do with your business, but eventually they may affect your ability to continue doing business. Interest rates, the availability of credit and consumer loans are external factors you rarely can control. Weather

    If man could control the weather, vacation resorts would know exactly when to charge the highest room rates. Storms, tornadoes, hurricanes and wildfires are outside your purview of controllable business factors. In addition to the direct impact a storm may have on your ability to open your doors at any given time, widespread weather events often carry a substantial trickle-down effect to a wide range of businesses. Infrastructure

    Zoning laws, highway construction and housing development are particularly important to retail establishments, restaurants, manufacturers and other businesses that rely on a location for success. Changes in the local infrastructure may prove either disastrous or fortuitous to your company. Laws

    State, local or federal changes in the laws can have a direct impact on your business if the service or product becomes highly regulated or outlawed. Cigarette manufacturers learned this lesson when public smoking was outlawed in many areas and smoking indoors has become practically nonexistent. Government regulations such as those that affect the environment or communication are beyond your control and could have a direct impact on your business. Trends

    While you may spend a good part of your profits on marketing in the hopes of favorably influencing trends, some are beyond your control. An increase in technology use by your customers may be built into your strategic planning, but you may not have planned for the widespread use of social media that
    could affect your business. Celebrities who become advocates for a cause or decide to boycott a certain business practice can start a trend that could seriously affect your business if you’re on the wrong side of the trend. Customer Base

    Your target customer base may change suddenly or slowly over a period of time. The changing makeup of your neighborhood that attracts more singles or young renters can affect your business for example if you cater to a more upwardly mobile, family-oriented customer base. Cultural implications of a changing neighborhood may affect your business negatively or positively depending on your ability to meet the needs of changing demographics.

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