Definition: An external environment is a group of factors or conditions that are outside the organization but affect it in some extent. In business, this term commonly applies to elements related to out of control dimensions such as society, economy, regulations and political system.
What Does External Environment Mean?
Every organization must understand key aspects of its external environment because institutions do not exist alone. They interact with other entities and are influenced by a wide range of events, situations and other player’s decisions that are out of its control. No matter how the firm controls its internal processes, there are many other aspects that also impact the performance and ultimately affect profitability and growth.
Government decisions, competitor movements and changes in the socio-economic environment are some issues that must be known and understood by the company. Identification and comprehension of those elements allows more complete analysis of risks and potential threats. Monitoring trends and forecasting events support better strategies because the firm can take advantage of positive situations and minimize the effect of adversities.
Example
Nwarz & Hanlet is a growing company operating in a niche of the pharmaceutical industry. It has been very successful with a narrow portfolio but now the Board of Directors decided to analyze market possibilities in other pharmaceutical categories.
In this regard, they started studying the external environment. The analysis allowed the Board to identify were some risks related to competitors because of the potential introduction of large multinationals. It was also possible to identify regulatory constraints because the government imposes stricter demands in these new categories. Finally, consumers associations were more inclined to react negatively to new companies, since they had bad experiences in the past in some of the researched categories.
Nevertheless, the Board of Directors recognized opportunities in some of them. Thanks to the information gathered and analyzed in relation to the external environment the company was able to define a coherent growth strategy that positively impacted its performance.
