An organization's strategy must take into account both its internal and external environment. An analysis of both is necessary to understand the competitive environment and respond to it in a way that exploits the strengths and capabilities of the organization for competitive advantage

So how does the external environment differ from the internal environment

The internal environment of an organization consists of all factors that are within it - factors such as organizational structure, leadership and management style, organizational culture and business philosophy (e.g. market orientation, product orientation, services orientation) The external environment, on the other hand, is the environment outside of the business over which the organization has little or no control. The external environment surrounding the business can be subdivided into the macro environment and micro environment.  The macro environment consists of the broader national and global influences that have the potential to impact the business. These factors include such things as political changes, technological innovations, economic cycles, taxation changes, socio-cultural changes and demographic changes. The micro environment, on the other hand, are factors closer to the organization - factors within the industry or business sphere in which the organization operates. An analysis of the micro environment would encompass a study of customers, suppliers, competitors, possible new entrants to the industry and strategic partners

Figure 1.1 The External Environment Surrounding the Business

Why scan the external environment

The simple answer is that an organization needs to understand the big picture to detect changes and identify opportunities as well as to detect risks or threats to the business. The 21st century external environment is one characterised by continual change and uncertainty The success of an organization in meeting challenges caused by change will depend on its skills in monitoring the environment and anticipating changes ahead, and then responding to it

Reflect on some of the key changes in the external environment impacting your own organization. You will probably agree that the external environment is a rapidly evolving landscape, often with fundamental changes in the macro as well as micro environment. Shifting market conditions, innovations in technology, new economic and political realities, globalization and increased environmental consciousness for sustainability are just a few of the factors that add to the complexity of understanding the external environment. Then there are other important effects from strategic alliances and de-regulation that must be recognised in the micro environment for an organization to be successful

Regular auditing of the external environment enables an organization to address questions such as

What changes are there in regulatory frameworks that impact our operations
How do changes in income levels and inflation impact the buying power of consumers in the markets in which we operate
What changes are occurring in consumption patterns and tastes
What is the impact of political instability in certain countries on our operations and sale of market offerings
What opportunities can be exploited in emerging markets and from the rising middle classes inChinaandIndia
What technological innovations can be exploited in the market
What is the market strength of our competitors? What is their value proposition to the customer
What is the threat of new rivals in the marketplace
 

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

Charles Darwin

As with the survival of species, understanding the external environment and adapting to change is essential for the mere survival of organizations. However, to outperform competitors and achieve sustainable competitive advantage, an organization not only requires an understanding of the current environment, it must also build a picture (or even alternative pictures) of what the future environment might look like and have a plan to compete in the new world. It requires proactive and innovative responses to the challenges and changes ahead - gaining insights to engage customers in creative ways, adopting global perspectives in entering emerging markets, leveraging new technologies and developing competencies and organizational capabilities for the future world

After evaluating opportunities and threats in the external environment, some organizations may well decide that they should continue to operate and develop opportunities in existing markets; markets that play to their current strengths. Others may decide to enter completely new markets and acquire new resources and capabilities. Others may even decide to reinvent themselves. The greatest risk is to do nothing or lose the window of opportunity whilst competitors commit and leap ahead with the times

The focus of this unit is the external environment and we shall explore the frameworks that enable organizations to assess the external environment and make sense of it. Noting that the 21st century environment is characterised by rapid change and uncertainty, scenario planning by asking "what if" questions and envisaging different possible futures is also examined