Understanding how your business can be impacted by external factors

The notion that the world is a global village is not a fallacy in today’s world. Businesses do not exist in isolation and are impacted by factors beyond their control. In fact, what happens in one country and continent may have an effect on businesses in another country. Think of how manufacturing companies in China lost production demand after COVID-19 because countries and their global sourcing companies realised that they were over-reliant on China for manufacturing, and hence took a decision to diversify where they produce their products.

In business, success is largely dependent on choices made by leaders in every given situation; therefore, there must be constant adjustments to business decisions by continuously analysing business environment in order to sustain operations. Similar to what happened to the manufacturing companies in China, the emergence of COVID-19 which emanated from the external business environment caused most businesses to close down.

Likewise, Brexit, another incident emanating from external business environment, brought about both opportunities and threats to businesses. In the late nineties, Nokia lost market share due to technological shifts and changes to which they failed to adjust; simply put, Nokia’s competitors evolved and Nokia didn’t. In a similar vein, due to technological advancement, political and economic reforms, and reduction of protectionist policies, global consumers now buy and sell goods from the comfort of their homes, creating huge opportunities for companies such as Amazon and Alibaba.

The aforementioned examples clearly indicate the transformation power and impact that the external business environment has on organisations. This impact can either have a positive or negative effect on a company’s overall output, hence illustrating the multi-dimensionality of these external factors and the fact that it is outside the control of companies.

According to business literature, the external business environment is categorised by three factors: complexity, sudden shifts of factors which can be in favour or against an organisation, and fierce rivalry. These dimensions create high uncertainty, thereby making predictability difficult. It is therefore prudent for businesses to understand the likely threats and opportunities facing them, and be able to develop strategic capabilities and formulate strategies in order to use external factors in a way that will be beneficial to them.

External micro and macro environments are general classifications given to the external business environment. The external micro environment consists of factors which affect a company’s activities based on its operations and industry. On the other hand, the external macro environment consists of factors that are far-reaching to an organisation; hence, businesses do not have control over those factors. Although this categorisation is often used, it is not consistent across the business community because of the wide range of classifications which exist. This phenomenon has triggered businesses to continuously analyse, prepare and adjust to take advantage of opportunities or curtail threats presented by the external environment.

Source: King A. Wellington

Figure 1.0: External micro and macro factors

Emphasizing the six factors which constitute the external micro environment illustrated in Figure 1.0, businesses rely on inputs – transforming or transformed resources – such as raw material and information in order to produce products or services for consumers. This makes suppliers a key micro-level factor that can have an adverse impact on businesses. Over-reliance on one supplier is risky because any disruption in the supplier’s operation can affect a company’s input resources.

Furthermore, without customers it will be unlikely for any business to generate revenue and be sustainable; hence, it is in the interests of a company to keep its customers satisfied. Likewise, competition plays a key role in business survival. Businesses want to capture higher market share, have the best product and even offer the best price to consumers in most cases, thereby increasing competition.

Market intermediaries such as agents and distributors are essential to most businesses, and their actions affect business operations. For example, in Ghana, UBER’s service was almost interrupted because drivers, who are market intermediaries of UBER, refused to continue offering services due to poor treatment from the company.

Finally, stakeholders affect or are affected directly or indirectly by a company’s operations. Media, unions, government and civil society organisations are all part of a company’s stakeholders, hence failure to properly manage these groups appropriately will affect the company negatively.

Furthermore, how an economy is structured, the fiscal and legal systems adopted by a country affect businesses operating in the country. Let’s take, for instance, that laws in Ghana prohibit foreigners from engaging in retailing within the country. This economic reform negatively affected traders from neighbouring countries who had already invested in retail business across Ghana, assuming they were established before the law was enacted.

Think of how the African Continental Free Trade Area (AfCFTA) will also affect both new and existing players in each sector. Furthermore, the political philosophy of a government as well as legal structures equally have an impact on a business. For example, liberalists favour a free market while socialists aim to provide equal opportunities for all.

Technology is also a macro-level factor that affects businesses. Technological advancement is geared toward improving operational efficiencies, achieving competitive advantage and creating frontier opportunities. Companies that take advantage of technology continue to stay in business. For instance, DVD and MP3 players’ manufacturers that failed to evolve during emergence of smart consumer electronics such as phones and televisions went out of business.

Again, a country’s population dynamics – such as size, gender composition, educational level, life expectancy rate, mortality rate and rural-urban migration mix – form part of the demographic macro-level environment. These factors affect businesses on all levels. This is because when a country has a youthful and educated population, businesses have a skilled and qualified labour force to utilise. Likewise, an aged population can be beneficial or a handicap to businesses depending on the products or services offered.

In line with the above, businesses must develop or adopt frameworks and techniques to analyse and manage uncertainties of both micro and macro environmental factors. Figure 2 is an illustration of some existing tools which can be adopted.

Source: King A. Wellington

Figure 2.0: Tools to analyse external environment

Using tools to analyse the business environment ensures systematic and critical interpretation of happenings to predict future occurrences. It is argued that elucidating findings after analysing a company’s environment should be void of any prejudice. PESTEL analysis is the most basic framework used by strategists, and it’s effective in analysing macro factors. Specifically, it is used to appraise political, economic, socio-cultural, technological, environmental and legal factors of a market.

Furthermore, to determine possible success of products or services, companies use Porter’s Five Forces to assess their competitive strengths and position; thereby understanding the five key competitive forces – namely suppliers and buyers influence, level of competition and threats, new entrants and substitutes – which drive strategy is critical to success. Figure 3.0 is a sample competitive analysis of Ghana Oil Company Limited (GOIL) using Porter’s Five Forces.

Source: King A. Wellington

Figure 3.0: Porter’s Five Forces Competitive Analysis of GOIL

Another tool is the industry lifecycle analysis, which is useful because companies can set targets and forecast performance based on the phase of an industry; hence, whether there is an expansion, peak, contraction or trough. Figure 4.0 is a sample analysis of the downstream petroleum industry in Ghana.

Figure 4.0: Industry Lifecycle Analysis

Additionally, although companies often analyse external environments and strategise to curtail negativity or take advantage of positive factors, the inability of firms to clearly implement these strategies leads to failure. Adopting a framework such as the ‘strategy diamond’ shown in Figure 5.0 provides a roadmap to successful strategy implementation.

Figure 5.0: Illustration of the strategy diamond

According to business literature, arenas address key activities regarding markets and location as well as core competences that a company possesses. Differentiators deals with exclusivity and distinctiveness of a company. The economic logic segment addresses revenue streams of a company, while the vehicle segment deals with the mode of delivery for the strategy. It is prudent for firms to incorporate dynamic measures in their strategies because of continuous evolvement of the external environment, and this makes the staging segment significant.

I must admit that most strategies fail, hence having a good implementation plan is vital for success. Additionally, I have noticed that due to the high resistance to change, most strategies are unable to be deployed effectively; hence, it would be good to have a change management framework in place before implementing a strategy.

In conclusion, for businesses to thrive, it is imperative to be aware of the impact of its external business environment and adequately prepare in order to take up opportunities as well as shield the organisation from threats, thereby gaining more insight and skillsets. Businesses must build their competencies to be able to predict future occurrences which can affect them positively or negatively. Finally, as expounded by the contingency theory, business decisions should be multidimensional and based on how businesses position themselves with external environmental factors; hence, managing a company should be dynamic and not static.

About the writer:

King is a business strategist with expertise in executing projects and helping companies achieve their goals in diverse industries.

 

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