Business Environment: PEST Analysis & Porter’s Five Forces
The Economic and Social Business Environment
A company is an open system that is related to the economic environment and social context in which it operates. Therefore, it is affected by variations that occur around them, such as changes in social customs or economic status. The study of external factors affecting the company begins by distinguishing between the generic environment and the specific environment, or closest to the organization. The generic environment is determined by the social and economic system in which the organization operates (i.e., national and international economy, natural environment, demographic structure, social structure, government, and technology). The specific environment refers to the sector in which it operates, which consists primarily of competitors, suppliers, and customers.
Generic Environment Factors
The generic environment of a company refers to all those external factors that may influence its results. The company cannot control these factors but must take them into account when developing its strategy. An uncertain environment is one of the major problems for company management. When the environment is simple and stable, it is easier to make decisions because one knows what will happen in the future. When it is very dynamic and complex, subject to frequent change, it is much harder to make the right decisions because no one knows what their possible consequences will be.
To analyze the environment, we use PEST analysis, which considers four types of variables:
- Political-Legal: These include administrative rules and laws affecting the company in developing its business.
- Economic: Monitoring economic indicators and developments to understand the economy and see how it can affect the company’s activity.
- Socio-cultural: Recording the values, beliefs, and attitudes of the community to which the enterprise is directed, as well as the demographic and cultural conditions of society.
- Technological: Refers to the scientific and technological framework that surrounds the company. This is very important in managing innovation and preventing product obsolescence.
Companies developing their activities are affected by these external factors, but we must also take into account their influence on them and change their behaviors accordingly.
The Specific Environment or Field of Activity
The industry is the framework in which the firm operates and that influences its competitiveness, i.e., its position compared to competitors and therefore its ability to survive in the market. A sector is composed of all companies that develop in the same industry, with similar products or production processes. All companies that make up a sector, or segment thereof, are intended to satisfy the same type of buyers’ needs. Therefore, they have to compete to attract customers and thus achieve their objectives.
The key issue is to determine, in each case, the level of existing competition to determine the competitive pressure participants have to bear. American professor M. Porter believes that in any sector of activity, the rules of competition are embodied in five competitive forces:
- Current Competition
- The threat of new entrants
- The threat of substitutes
- The bargaining power of suppliers
- The bargaining power of customers