E/LMS 406: Key Things About External Environment That Leaders Should Know

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The experience and research of organisations suggest that their growth and profitability are affected by what is happening in the external environment. An analysis of the external environment has become an explicit and vital activity for strategic leaders in order to identify and evaluate trends and events beyond the control of the organisation. External environmental analysis also reveals key opportunities and threats confronting the organisation that could have a major influence on the strategic actions and direction adopted. This is even more critical considering the globalisation of markets and the competitive nature of business today. The information could be applied for benchmarking purposes, for determining competitive strategy or for redirecting the organisation in general.

External environmental analysis needs to be a continuous process and should focus on the following four interrelated activities:

Scanning: Identify early signals of environmental changes and trends.

Monitoring: Detect the meaning of environmental changes and trends through ongoing observation.

Forecasting: Develop projections of anticipated outcomes, based on monitored changes.

Assessing: Determine the timing and importance of environmental changes and trends for the organisation’s strategy and management.

What Needs to Be Analysed?

External environmental analysis should focus on the macro-, industry-, and market environment of the organisation. Examples of the elements that should be analysed in these different environments are shown in the table below:

Click here to view a video on the PESTLE Analysis

	SEGMENT	EXAMPLES
MACRO	Political/legal environment	Local, provincial, and national laws and regulations Actions by special interest groups Pricing policies, e.g. price regulation Company tax and tax-related decisions and laws Minimum wage legislation Antitrust laws Labour legislation
	Socio-cultural environment	Demographic changes Cultural changes Social changes Changes in consumer demand Trends like: More educated consumers Ageing populations More influential minorities Higher incidence of single parenthood
	Economic environment	Inflation rates Interest rates Unemployment rate Level of disposable income Availability and cost of credit Trends in the GDP Monetary policy of the Reserve Bank Changes in the value of currencies
	Technological environment	Product innovations New communication technologies Technologically advanced processes, materials and equipment
	Ecological environment	Air, water and soil pollution Global warming New/changing environmental legislation and regulations
	Global environment	All the above segments and examples as applicable to international trade partners, suppliers and competitors

INDUSTRY

Own industry intelligence

Industry characteristics
Industry structure, e.g. concentration, economies of scale, product differentiation, barriers to entry
- Competitive forces, e.g.
- Rivalry among existing organisations
- Threat of new entrants
- Bargaining power of buyers
- Bargaining power of suppliers
- Threat of substitute products

MARKET	Suppliers	Prices of suppliers Bargaining power Production standards and quality Speed and reliability in delivery Supplier reputations After-sales service Supplier relationships Changes in nature, number or types of suppliers
	Distributors/intermediaries	New distribution channels Value chains Impact on price
	Customers	Demographics Geographic’s Bargaining power Disposable income Changes in tastes and needs Purchasing power Purchasing behaviour Emerging markets
	Competitors	Competitor capabilities Competitor strategies Future objectives Threat of new competition Global competition

Where to Source This Information

Several sources can be used to analyse the external environment, e.g.:

Newspaper articles, professional magazines, books and trade journals
Suppliers (informal discussions; literature and publications)
Customers (informal discussions; customer surveys)
Salespeople
Purchasing managers
Customer service representatives
External network contacts (see learning unit 4 and 5 for more detail on networking)
Internet

Once external opportunities and threats have been identified, evaluated and matched with knowledge about the internal environment (strengths and weaknesses), it will be easier for the organisation to develop a clear mission, design strategies to achieve long-term objectives, respond either offensively or defensively to the factors and to develop policies to achieve goals which will result in strategic competitiveness and above-average returns.

E/LMS 406 Leadership Communication

Key Things About External Environment That Leaders Should Know

What Needs to Be Analysed?

Where to Source This Information