Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.
What Are External Forces?
No business operates in a vacuum. Even the most powerful monopoly - a business with essentially no competition - needs to pay attention to factors outside the organization that are beyond their control. These factors impact each business and industry differently, which only increases the importance of managers understanding these external forces.
Types of External Forces
There is no shortage of frameworks and acronyms that attempt to summarize the types of external forces that impact businesses. One of the most common - and simple - is PEST which stands for political, economic, social, and technological. It's easy to remember because, to many managers, factors that impact their success so much but that can't be controlled are exactly that - a pest! This image represents the PEST framework.
Political forces include regulatory requirements, legal concerns, and any impact from the current political climate of the country or region where the business operates. For example, beginning in 2008, health care companies began anticipating dramatic changes to the US health care system as President Obama made health care reform his top priority.
Political forces do not only exist in the home country of a business. Many US companies operate in China, a country where the government has much more influence over business behaviors. These US companies must be aware of the political pressures in China if they want to be successful in that attractive market.
The financial crisis of 2007-2008 demonstrated the impact that economic forces can have on companies. Businesses that had nothing to do with banking or the housing industry saw their revenues drop, sometimes dramatically, as unemployment rose and disposable income dropped. Those companies that were in the financial and housing industries were fighting for survival every day - a battle that some 100-year old companies lost, such as Lehman Brothers and Bear Sterns.
Any change in the economy that impacts the supply or demand for a company's products and services fits into this category. Sometimes, they have a positive impact, like when a country's gross domestic product (GDP) increases more than expected. Other times, economic forces can hurt a business, like when consumer confidence drops, and potential customers spend less and save more.
Social factors are those that reflect the preferences, fads, and trends in society. Media companies are very sensitive to social trends as their business model is to produce content that reflects society's interests. Reality TV, unheard of 20 years ago, is now some of the most watched productions in prime time. Social trends often follow technological trends. For example, technological forces made email possible, but once available, society quickly demonstrated the preference to email over sending a letter or making a phone call.
Advancement in technology has had a dramatic impact on the business world over the last two centuries, and especially over the last 30 years. Anticipating changes in technology and capitalizing on those changes can become a competitive advantage - like when Apple anticipated the shift away from CDs to electronic media and introduced the iPod. That single product innovation put Apple on the road from a failing company with a stock price of $6 in 2001 to the largest company in the world and a stock price of over $700 in the fall of 2012.
While anticipating technological changes can transform a company, ignoring those forces can destroy a company. Kodak was the market leader in photography and film until the 1990s when digital cameras started becoming popular. Kodak managers saw digital photography as a fad, believing that consumers will always prefer hard copies of their photos. Wrong! While Kodak still exists today, it is not much more than an afterthought in the digital media industry.
The same can be said of Research in Motion, the company that made the Blackberry - the world's first smartphone. Until around 2008, Blackberry was the most popular smartphone in the business and government worlds, a position reflected in their stock price of over $140 that same year. When competitors introduced smartphones that eliminated the physical keyboard in favor of a touchscreen, Blackberry was convinced consumers wouldn't go for it. They were wrong, and now less than 10% of business and government employees have a Blackberry, and in the fall of 2012, Research in Motion's stock price hovered around $10.
While pretty much any external factor can be forced into one of the PEST categories, some models have added to the PEST model to allow for more specific types of factors. Most common are environmental, which include things like weather, availability of raw materials, and climate change, and legal, which pulls out factors like regulation and legal action from the political category.
Any framework that aims to analyze external forces is most helpful in identifying those forces, so the 'best' is whichever one helps you brainstorm the most applicable forces to your organization. Of course, identifying the factors is only the first step. To be successful, you must be able to accurately anticipate how those external forces will impact your business and adjust your strategy accordingly!
Let's review. External forces are factors outside the organization that are beyond a company's control. These factors impact each business and industry differently, which only increases the importance of how managers handle them. One of the most common frameworks used to summarize external forces is PEST which stands for political, economic, social, and technological. Along with those four factors, environmental and legal, though more specific, are also included.
Terms With Explanations
- Monopoly: a business with no competition
- External forces: factors outside the organization that are beyond their control
- PEST: external forces - political, economic, social, and technological
- Political: regulatory requirements, legal concerns, and any impact from the current political climate
- Economic: forces bothering one sector of the market may alter others
- Gross domestic product (GDP): an economic indicator of a country's success or downturn
- Social: factors that reflect the preferences, fads, and trends in society
- Technological: constant change in computers, smartphones, tablets and societal connections
- Competitive advantage: anticipating changes in technology and capitalizing on those changes
- Environmental: weather, the availability of raw materials, climate change
- Legal: regulation and legal action
Use this lesson to gain understanding of external business factors in order to subsequently:
- Define external factors as they pertain to a business
- Dissect the acronym 'PEST'
- Elaborate upon each factor
- Pinpoint other factors that can impact businesses
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