The External Business Environment and Its Sectors

Businesses do not operate in a vacuum. They sit inside an external business environment—the outside organizations and forces that shape how they operate and whether they reach their goals. That environment splits into seven sectors: economic, political and legal, demographic, social, competitive, global, and technological. Each one throws its own challenges and opportunities at a business.

Managers control the internal environment—the day-to-day choices of which supplies to buy, whom to hire, what to sell, and where. But the external conditions are generally beyond management's control and change constantly. No single business is large enough to reshape them, so managers act mostly as adapters rather than agents of change.

The economic sector is one of the most important external influences. Fluctuations in economic activity create business cycles: when the economy grows, unemployment is low and incomes rise; inflation and interest rates also swing with activity. Government policy—taxes and interest rates—tries to stimulate or cool the economy, and supply and demand set prices and quantities in a free market.

The political and legal sector covers the amount of government activity, the laws it passes, and the general stability of a government. A multinational like General Electric weighs a country's political climate before building a plant there: Is the government stable? How restrictive are regulations on foreign ownership, taxation, tariffs, quotas, and export restrictions?

Demographic factors are uncontrollable but extremely important. Demographics help companies define the markets for their products and determine the size and composition of the workforce. Generations each shop differently: the more than 75 million millennials (born 1981–1997) surpassed baby boomers as America's largest generation in 2017 and spend freely despite not yet peaking in income; Generation X (1965–1980) and baby boomers (1946–1964) have their own patterns, with many boomers spending on health, comfort, leisure, and cars.

Minorities now make up over 38 percent of the population, projected to reach 56 percent by 2060, so companies hire diverse workforces and target products to different ethnic groups.

Social factors—our attitudes, values, ethics, and lifestyles—shape what, how, where, and when people buy. They are hard to predict because they are subjective and shift as people move through life stages. People today have broader interests that defy old consumer profiles, feel a 'poverty of time' and want more control over it, and changing roles have brought more women into the workforce—raising family incomes, boosting demand for time-saving goods, and reshaping shopping patterns.

Technology can stimulate growth under any economic system. New equipment and software that improve productivity and cut costs can be a company's most valuable assets. A nation's ability to build wealth depends on how quickly and effectively it uses technology—inventing more efficient equipment, developing new products, and making information instantly available.

Why must managers treat the external environment as something to adapt to rather than control?

The remaining two sectors—competitive and global—are part of the seven, but this unit focuses on the five that shape day-to-day adaptation. The competitive and global sectors are covered in the Trends Reshaping Business and Competition unit.

Which sector does each scenario belong to?