The external environment is the “external context within which an organisation exists and
operates.”1 One of the ways in which the external environment can be analysed is by
assessing the impact of politics, the economy, social factors and technological factors
(P.E.S.T. analysis).
The organisations are affected either generally or immediately by the external
environment. The immediate factors, also referred to as the operational environment,
include aspects such as suppliers, financial institutions, customers and labour markets.
The general features, or the contextual environment, comprise of the economic, political,
legal and technological influences, for example.
The political environment has an affect on businesses because they can influence the
market structure and behaviour. The market structure is the share of a market particular
companies have. The government have a regulation that states that no company can gain a
bigger market share than twenty five percent, other than through organic growth. They
control taxation and are responsible for any international trading blocs, therefore
restricting overseas trade.
The social environment has an impact on supply and demand. The amount of disposable
income a person or group of people have influence sales and therefore play a big factor for
companies. The demographics of a country affect this, as products have to be marketed and
produced for specific consumers.
The success of a business is influenced by technology because the innovation and
investment of new technology increase competition because efficiency is usually
increased.
The economic environment is affected by the government and can be viewed alongside
one and other. Unemployment levels, inflation and interest rates are all part of the
economical factors on business and are clearly also part of the political environment.
One of the main factors of the economy is inflation. Inflation is “a sustained rise in the
average price of goods within an economy.”2 Inflation occurs usually through their being a
bigger demand than supply of a good. This results in increased prices and this allows a
firm to increase wages to attract the sources to meet the demand.
Inflation can act positively on a business because if they have taken out a substantial loan
then it actually becomes easier to pay back because inflation has reduced the real value of
the sum that is outstanding. This is because the firm is creating a much larger income than
it normally would due to the increase in prices. So although sales may drop due to
increased prices the profits are likely to still increase because of the demand for the good.
