The external environment of a business includes a variety of factors such as competitors, suppliers and regulations that influence major strategic decisions. Scanning and assessing the external environment is a vital part of strategic decision-making in entrepreneurial ventures. This helps small-business managers locate factors that pose opportunities or threats to their businesses. A better understanding of the ramifications of external environmental factors can improve success and survival for small businesses.
In formulating strategic decisions, managers need to consider present and future environmental opportunities and threats. Entrepreneurs develop a basic business idea with a target customer base. Then they proceed to scan the environment for opportunities and threats and analyze the results in the light of company’s resources and strengths. This analysis gives the managers the information to decide on the feasibility of the business idea. Oversight in identifying opportunities or threats can lead to misguided strategic decisions and business failure. Task Environment
The task environment of a business includes the components of the environment that the company deals with directly, such as customers, suppliers and competitors. Customers are the central stakeholders in strategic decision-making. Any decision that sidelines the needs of the customers can potentially lead to loss of business. Suppliers provide inputs for the value-creation process of the company. Any lapse in the quality of their products and services can affect the operations of the company and eventually trickle down to the customer.
As a result, the management works with suppliers to ensure they provide timely and quality service. Any strategic decision should consider the reaction of competitors. Strategic decisions may strengthen the position of the company in relation to competitors or may leave the company vulnerable to competitor attacks. General Environment
The general environment comprises those components of the environment that impact the business indirectly, such as the government, socio-cultural, technological and economic conditions. For example, the company should comply with taxation, labor market and industry-related regulation. Additionally, technological advances pose new opportunities as well as threats. For example, new online music sharing formats threaten to alter the entire recording industry, and the advent of the Internet made e-commerce a reality. Sources of Innovation
The environment holds potential sources of innovation for an entrepreneurial venture. An unexpected success or outside event can indicate a business opportunity. For example, Don Cullen of Transmet Corporation spilled fine aluminum flakes onto the company’s parking lot and later observed that the asphalt did not turn sticky in high temperatures. This discovery led to the idea of producing aluminum chips for roofing. Sales doubled every year since the commercialization of the product.