This assessment addresses the following subject learning outcomes:
a) critically evaluate the effect of the external environment on firms.
b) select and apply appropriate frameworks to resolve the challenges faced by firms.
A firm conducts its operations while considering all that happens beyond the office walls that will affect its internal functions. These factors that influence domestic transactions that originate from outside the business are known as external factors. External factors eventually affect organizational goals and strategies (Babatunde & Adebisi, 2012). Corporations have no control over external factors that affect them. Therefore, their continued success in a changing external business environment depends on the capability to adapt to the environment. The external environment is also known as the operating environment (Botha, Kourie,& Snyman 2014) . These factors include economic issues, political considerations, demographic issues and changes in market conditions. External environment can be either positive or negative since it gives rise to an equal measure of opportunities as it does risks for an organization.
For this report, I will use Bakers Delight, an Australian public company, as a case study to examine external factors that affect a firm, the challenges they bring and suggestions on how to solve these challenges. Bakers Delight is a bakery that is Australian-owned with branches in Australia, New Zealand, and Canada. All its products are fit into three groups; bread sweets and savories. The firm was founded in 1980 and now, years later, has more than 700 outlets around the world. This sizeable firm attempted to go into business in the United States market but it was unsuccessful, but it has tried again in 2016. The company is of considerable size. In the year 2017, total revenue of more than 86 million dollars was generated. This includes sales and other incomes. In the same year, the company recorded having a total of 404 employees in Australia only. Considering these facts, it is clear that the study of the company will comfortably be able to aid in investigating on external factors that affect firms.
Factors that influence firms externally are majorly economic, political and technological. The economic environment constitutes the economic factors that influence the consumer's behavior and the business's behavior. Some economic factors that affect business include interest rates, inflation, exchange rates, taxes, recession and demand or supply. Interest rates are of concern to industry since most businesses’ source of capital includes taking large loans (Gupta, 2013). This money from loans enables the firm to further their operations.
If say Bakers Delight requires new equipment and new technology to advance their current operations, and they opt to go for a large loan from a bank, but the interest rates have increased. This will lead to a higher production cost since the higher interest rate is part of the cost of production. To compensate for these higher production costs, Bakers Delight will increase the price of the food it produces. This also affects the consumers with loans because they have to pay more interest to their lenders thereby reducing their disposable income and consequently decreasing the revenue set aside for consumption. Overall, the consumer level decreases. In case of lowered interest rates, the cost of production reduces, prices may remain constant or cut, and buyers have a disposable income to spend on the baked goods (Prajogo, 2016). Since the firm cannot overcome the interest rates, the optimal solution is to take advantage of a rise in interest rates by investing a part of their income in bonds, and this will be a source of income in later years.
Raw materials and technology are mostly imported from overseas. In the case of Bakers Delight, if the Australian dollar has more value than the exporter's currency, then importing becomes cheap but the opposite is true. Therefore to avoid such a situation, we're introducing will be expensive, the firm could source the raw materials and technology internally. If they are not available, they should source from countries with less currency strength than they should.
Higher tax rates are out of business' control (Cai & Yang, 2014). When this happens, the cost of production increases and the price of their products will rise. This will reduce their consumption levels since some will not be able to afford the new prices. To deal with this, in the case of Bakers Delight, new products could be offered. The new delicious goods will see customers' return since it will be worth the extra coin. The cost of production of these new goods should relatively remain the same as the conventional produce to ensure profits.
Australia is generally a dry place and drought strikes at times. This is beyond anyone's control. In times like this Bakers Delight will have to source raw materials from overseas. This is because farmers in Australia will not have adequate produce to supply to them. The solution to this is to find overseas suppliers from countries with lower currency strengths if possible but still ensuring quality (Wetherly, 2014). The firm could also grow their raw materials and be their suppliers. Since they are aware of dry conditions, they will be able to choose the best farming method that will ensure they have raw materials even in drought.
An economic recession is a reduction in economic activity that spreads widely and lasts for a period. Whether a recession is of a high or low scale, it changes the purchasing level of consumers(Kaplan, Robert, Davenport, Kaplan & Norton, 2001). Taking Bakers Delight to illustrate this, in the presence of an economic recession the firm might lower their prices to encourage purchases. The firm will also reduce their production levels to fit consumption levels to avoid wastage. This is a good solution for the time since the economy will not be in the recession period forever.
Businesses all over the world, in countries with a government, are subject to a government made regulations. This is because it is paramount for all companies to adhere to the set laws. Therefore, to ensure optimal production, firms have to analyze how a change in legislation will affect their operations (Ho,2014). A decision to increase or decrease taxes is made by the government. Thus, a change in taxation is as much a political factor as it is an economic factor. Examples of other political factors that affect a business include; a level of corruption, presence or absence of bureaucracy, trade control, set tariffs, employment law, and intellectual property law and consumer protection.
Government spending causes an effect on the economy. If there is increased government spending, the unemployed will get jobs that will earn them income. More income results in people having a disposable income to spend on consumption. In the case of Bakers Delight, an increase in government spending will be an advantage since consumption levels will increase raising their profits eventually. If there is a decrease in government spending, its overall effect will depend on the scale. Past a certain level of decline in government spending, it adversely affects the economy hence people have less to spend on consumption.
Competition develops among businesses that are similar. It may happen whereby one firm lowers its prices further than the other firms to attract customers. In a case like this, it will be more efficient for the other companies to develop different strategies to gain customers. If a business also lowers its prices further than the other industry, it will cause a reduction in profits hence not meeting the aim of profit making of a company. This is an unhealthy competition. Bakers Delight has a lot of competitors such as Breadtop, Balfour, Brumby's Bakeries, Mrs. Mac's Pies and Pie Face. To cope with competition from these stores, Bakers Delight does not lower its prices, but instead, they ensure quality products that can compete for them instead of using price to compete. Firms need to have a diverse range of products that are of high quality to compete in the market as seen from the example of Bakers Delight. This will create healthy competition.
The consumers' opinion on a firm affects it either positively or negatively depending on the idea. Therefore, firms have to come up with strategies that will ensure consumer concerns are looked at to ensure their marketability is improved. Some consumer concerns include the environment and their satisfaction. To ensure this happens, production firms should use environment-friendly materials. Customer satisfaction should also be among the key objectives of a firm. When these conditions are met, the public will have a favorable public opinion towards the firm. Bakers Delight uses calico bags that are environmentally friendly. These bags are biodegradable, and for each kit sold, 5 cents are donated to aid in cleaning up Australia.
All businesses are not only affected by factors that are internal but also by external factors. A firm has no control over these external factors. Since these external factors cannot be changed, firms have to have the capability to adjust to the conditions. This ability will define the firm’s success or failure. Environmental factors are analyzed to enable the firm to make working strategies. These external environmental factors are economic, political and technological. Also, other factors do not necessarily have to fall under these categories such as competition and the public opinion. To ignore external environmental factors is to walk a path of an unsuccessful business.
Babatunde, B. O., &Adebisi, A. O. (2012).Strategic Environmental Scanning and Organization Performance in a Competitive Business Environment.Economic Insights-Trends & Challenges, 64(1).
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Cai, S., & Yang, Z. (2014). On the relationship between the business environment and competitive priorities: The role of performance frontiers. International Journal of Production Economics, 151, 131-145.
Gupta, A. (2013). Environment & PEST analysis: an approach to the external business environment. International Journal of Modern Social Sciences, 2(1), 34-43.
Ho, J. K. K. (2014). Formulation of a systemic PEST analysis for strategic analysis.European academic research, 2(5), 6478-6492.
Kaplan, R. S., Robert, N. P. D. K. S., Davenport, T. H., Kaplan, R. S., & Norton, D. P. (2001). The strategy-focused organization: How balanced scorecard companies thrive in the new business environment. Harvard Business Press.
Prajogo, D. I. (2016). The strategic fit between innovation strategies and business environment in delivering business performance. International Journal of Production Economics, 171, 241-249.
Wetherly, P. (2014). The business environment: themes and issues in a globalizing world. Oxford University Press.
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