Question

6. Describe the critical steps in examining the external environment of a new business.

Answer 1

An external environment consists of all the outside factors that can influence the business operation. These factors are not within the management control.

If you are starting a new business, examination of the external environment is to be carried out necessarily.  The steps are:

Step1

Understand all the environmental factors before moving to the next step.

All the environmental and socio- economic factors which we can contribute to the entry of the new business into the market should be thoroughly understood. If a new business is set up without understanding the external environment the organization may fail to achieve its objective.

Step 2

Collect all the relevant information.

All the relevant information regarding the business should be collected from all available sources like customer, Journals, newspapers and trade magazines etc.

Step 3

Identify the opportunities for your organization.

The opportunities that the upcoming business organization is having should be identified properly. Why customers preferred this organization over the existing organization should be studied.

Step 4

Recognize the threats your company faces.

• Threat of potential entrants

It measures the difficulty for newcomers to enter into the industry. Factors to determine the barriers to entry generally include brand loyalty, excess production capacity, and governmental regulations.

• Bargaining power of buyers

This measures to what power consumers have in determining the prevailing price in a market. Buyers’ bargaining power is high when buyers are large and concentrated, and buyers’ price sensitivity is very high when there are many industry competitors and substitutes available.

•  Bargaining power of suppliers

This measures how much a supplier is able to restrict the company’s business strategy. The supplier bargaining power is high when suppliers are large or concentrated. Purchasers’ price inelasticity is high when there are small alternative suppliers and when there are few substitute inputs available.

Step 5

The final step is to take action.

The final step is to take action accordingly. The business which is set up by considering texture environment do not usually fails in achieving its objectives.