Five Components of an Organization’s External Environment

Customers

Customers buy products or use services. They may be individuals, but also may be manufacturers, wholesalers or corporate clients. To compete, a business must deeply understand its customer’s needs and desires. Analyzing this environmental component allows a business to make sound strategic decisions that affect operations.Customer-oriented changes such as extra services, new products, or expanded hours of operations might sharpen a company’s competitive edge.

Competitors

A business occupying the same marketplace as another company that provides similar products or services has a competitor. A rival company may vie for the same customers through some mix of service, product features, quality, convenience, selection and price. To enhance customer service, the competition may choose to provide delivery options, good warranties and generous financing. To compensate for this external force, a company must keep abreast of the means the competition uses to lure customers, and objectively analyze the competitor’s strengths and weaknesses. An existing business must also know when new competition enters their market.

Labor Environment

Labor as a factor of the external environment refers to the people a company hires to fill its positions. A company rises and falls on the competence and expertise of its workforce, so finding qualified candidates in the community is crucial. In assessing the labor environment, companies should look to characteristics that include the average educational level of the community, training programs available, technical know-how, and diversity, which is increasingly necessary in a globally connected world. Changing population patterns such as changes in the community’s average age should also be assessed.

Owners

For a business run by hired managers, the owners of the business become a part of the company’s external rather than internal environment. Owners might not only be those who started the business, but may also include stockholders. Owners expect returns on their investment, and management must pay attention to their concerns, since from owners comes a manager’s formal authority.

Suppliers and Partners

Suppliers provide a company with needed resources. Some companies have deep alliances with their suppliers, increasing supply reliability, but also increasing a company’s dependence. Partners are those organizations a business teams up with to accomplish some mutually beneficial goal. Naturally, forces affecting suppliers and partners may end up also impacting the companies working with them. For instance, a scarcity of resources will impact the supplier and, therefore, the company, perhaps in the form of price increases or supply availability.