Explain How External Environment Influence an Organisation's Strategy Formulation

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External environment aims to help an organisation to obtain opportunities and threats that will affect the organisation’s competitive situation. External opportunities are characteristics of the external environment that have the potential to help the organization achieve or exceed its strategic goals. External threats are characteristics of the external environment that may prevent the organization from achieving its strategic goals. Therefore, organisations must formulate appropriate strategies to take advantage of the opportunities while overcome the threats in order to achieve their strategic goals.

The external environment consists of variables that are outside the organization and not typically within the short-run control of top management. They may be general forces within the macro or remote environment, which consists of political-legal, economic, socio-cultural, technological forces – usually called PEST. Political-legal force influences strategy formulation through government and law intervention. For example, the environment law requires the world’s automobile manufacturers to reduce emission of green house gasses, and therefore these manufacturers have to reformulate their product strategy. Economic force influences strategy formulation through economic growth, interest rates, exchange rates and the inflation rate. For example, exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy, and thus influence strategy formulation of exporters. Socio-cultural force is about the cultural aspects, health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social-cultural factors affect the demand for a company's products and how that company operates. For example, increasing health consciousness can influence strategy formulation of fast-food companies that may have to adopt product innovation strategy. Technological factors include technological aspects such as R&D activity, automation, technology incentives and the rate of technological change. For example, rapid development of the information technology has significantly influenced the strategy formulation of logistics service providers who are now able to provide superior express services.

There may be specific forces within the micro or near environment, which involves analyzing the threat from the new entrant, rivalry among the existing players, pressure from the buyers, pressure from the suppliers and pressure from the substitutes. This is introduced in Porter’s Five-Forces Model. Profitable markets that yield high returns will attract new firms which eventually will decrease profitability for all firms in the industry unless the entry of new firms can be blocked by incumbents. The existing firms therefore need to formulate new strategies against potential entrants. For most industries, the intensity of competitive rivalry is the major determinant of the competitiveness of the industry. For example, high intensity of competitive rivalry in the automobile industry forces competitors such as Ford, Honda, to form strategic alliances or adopts the strategy of M&A. The bargaining power of buyers is the ability of customers to put the firm under pressure. For example, strong bargaining power of buyers in the computer industry put Dell under pressure. To deal with such pressure, Dell has to focus on relationship marketing strategy by offering value-added services to its customers. The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm, when there are few substitutes. Suppliers may refuse to work with the firm, or charge excessively high prices for unique resources such as Microsoft software and Intel chips which affects the formulation of price strategy of PC makers. The existence of products outside...
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