EXTERNAL ENVIRONMENT ANALYSIS

The analysis of the external environment in entrepreneurship development involves evaluating the factors
outside of an entrepreneur's control that can impact the success or failure of a business. This analysis helps
entrepreneurs understand the opportunities and threats in the market, guiding strategic decision-making.

ENVIRONMENT SCANNING:

Scanning of environment is the first step in the process of sensing environmental opportunities as discussed
earlier. The world ‘scan’ literally means to examine closely specially in search of something or to look
thoroughly to find the required information. Thus, scanning of environment is a close examination of the
environment to develop an understanding of the various factors to ensure start the perceived entrepreneurial
opportunity is compatible with them. It helps in knowing trends, issues and expectations from the environment.

These factors directly or indirectly influence the environment of entrepreneurship. They may exert influence
upon each other and do not operate in isolation and cannot be separated from each other.

Types of external environment

The external environment consists of 2 levels, i.e., micro environment and macro environment. Micro-
environment consists of the elements of forces that influence marketing and business directly. It includes
suppliers, customers, intermediaries, competitors and the general public.

Macro environment consists of demographic, economic, politico legal, socio cultural, physical and
technological forces, which are uncontrollable. These are all uncontrollable as far as the business is concerned

BUSINESS
ENVIRONMENT

MICRO ENVIRONMENT MACRO ENVIRONMENT

1. SUPPLIERS
2. CUSTOMERS 1.Economic
3. INTERMEDIARIES 2. Socio-Cultural
4. COMPETITORS 3. Politico-legal
5.GENERAL PUBLIC 4. Technological
5. Financial Market Environment
6. Natural/Physical
Tools for Macro- Environment Analysis:

• PESTEL Analysis: Analyzes Political, Economic, Social, Technological, Environmental, and Legal
factors.

1. Political Factors:

• Government policies, regulations, and stability.

• Tax laws, trade restrictions, and political climate.

• Influence on the ease of doing business, licensing, and operations.

2. Economic Factors:

• Economic conditions such as inflation, interest rates, exchange rates, and economic growth.

• Consumer purchasing power and disposable income.

• Impact on funding, investment, pricing, and demand for products/services.

3. Social Factors:

• Cultural trends, demographics, and population growth.

• Changing consumer behaviour and lifestyle preferences.

• Influence on product demand, marketing strategies, and customer needs.

4. Technological Factors:

• Technological advancements and innovations.

• Automation, digitization, and new production techniques.

• Impact on product development, efficiency, and competition.

5. Legal Factors:

• Relevant laws regarding employment, consumer protection, health and safety, and intellectual
property.

• Legal requirements for compliance in specific industries.

• Impact on operational risk and business liability.

6. Environmental Factors:

• Ecological and environmental regulations.

• Climate change, sustainability trends, and the push for greener practices.

• Impact on supply chains, production processes, and corporate responsibility.

• SWOT Analysis: Helps in identifying external Opportunities and Threats.

1. Opportunities help businesses identify areas for growth, such as entering new markets,
offering new products, or adopting new technologies.
2. Threats highlight potential risks in the external environment that businesses need to mitigate or
plan for, such as rising competition, changing regulations, or economic instability.
Tools for Micro-Environment Analysis:

While PESTEL analysis focuses on the macro-environment (political, economic, social, technological,
environmental, and legal factors), Porter’s Five Forces digs deeper into the micro-environment by analyzing
the competitive forces within an industry. This tool helps businesses:

• Understand the dynamics of competition.

• Assess industry profitability and attractiveness.

• Develop strategies to gain a competitive edge.

Porter's Five Forces Model is a widely used tool for environmental analysis, particularly focused on
understanding the competitive environment of an industry. Developed by Michael Porter in 1979, this model
helps businesses assess the level of competition and the attractiveness of a market by analyzing five key forces
that shape competition.

Porter’s Five Forces:

1. Threat of New Entrants:

o This force examines how easy or difficult it is for new competitors to enter the industry. Factors
such as barriers to entry, capital requirements, and regulatory hurdles are considered.

o If it’s easy for new companies to enter the market, the competition intensifies, potentially
reducing profitability.

2. Bargaining Power of Suppliers:

o This force assesses the power that suppliers have over the industry. If there are few suppliers,
they have more control over pricing and supply terms, which can impact profitability.

o Strong supplier power can increase costs for businesses within the industry.

3. Bargaining Power of Buyers:

o This force analyzes the influence customers have on pricing and product offerings. If customers
have many alternatives, they can demand lower prices or higher-quality products.

o High buyer power can force businesses to reduce prices or offer more value to remain
competitive.

4. Threat of Substitute Products or Services:

o This force examines the likelihood that customers can find alternative products or services that
meet the same needs.

o If substitutes are readily available and affordable, it can limit the pricing power of companies in
the industry.

5. Rivalry Among Existing Competitors:

o This force looks at the intensity of competition among current businesses in the industry.
Factors such as the number of competitors, product differentiation, and market growth are
analyzed.

o Intense rivalry can lead to price wars, advertising battles, and product innovation, affecting
profit margins.

In summary, Porter’s Five Forces is a valuable tool for analyzing the competitive environment, helping
businesses understand the factors that affect competition and how to position themselves effectively within
their industry.
 • SWOT analysis helps a business assess where it stands by summarizing its strengths and weaknesses
relative to opportunities and threats in the micro-environment.

1. Strengths (Internal): These are internal attributes or resources that give a company an advantage
over competitors.
Example: Strong brand identity, superior customer service, or technological leadership.
2. Weaknesses (Internal): Internal areas where the company lacks resources or capabilities
compared to competitors.
3. Example: Limited product range, poor financial health, or lack of innovation.

CASE STUDY FOR PESTEL ANALYSIS:

Starbucks' Journey to Global Success and Analysis of External Environment

Once upon a time, in a bustling city called Seattle, a small coffee shop named Starbucks was born in 1971.
Howard Schultz, a passionate entrepreneur, saw potential in turning the humble coffee shop into something
much bigger. But this wasn’t going to be easy. Howard knew that the world outside his coffee shop was full of
challenges, opportunities, and surprises. He realized that to make Starbucks successful, he would need to
understand everything happening outside the walls of his business. He had to understand the external
environment.

As Starbucks started growing, Howard began to notice that the world was changing fast, and so did the way
people lived, worked, and drank coffee. To make smart decisions, he and his team had to keep a close eye on
what was happening in the world around them.

One day, Starbucks decided to expand into new countries. "Let’s open stores in China and India!" Howard said
enthusiastically. But his team quickly reminded him, "It’s not that simple, Howard. We need to understand the
local politics." Each country had its own rules about how businesses could operate. Some governments taxed
heavily, while others gave companies like Starbucks tax breaks. In China, political stability was key, but
Starbucks had to follow strict regulations. Howard realized that expanding internationally wasn’t just about
opening stores; it was about navigating government policies and making sure Starbucks played by the rules.

1. Political Coffee Storm:

• Global Expansion Regulations: Starbucks operates in multiple countries, requiring adherence to

various regulations regarding trade, taxes, and foreign investments. Political stability in countries like
China and India has been crucial for Starbucks’ growth.

• Corporate Social Responsibility (CSR): Starbucks has been proactive in complying with
environmental laws and ethical sourcing standards, which aligns with government initiatives and
improves its brand image.

As Starbucks grew, the economy started shifting. During times of economic growth, people had more money to
spend on their daily lattes and frappuccinos. But during the 2008 global financial crisis, Howard noticed fewer
customers coming into the stores. “What do we do?” his team asked. "We can't lose our customers!"

Howard had an idea: affordable breakfast deals and loyalty cards that gave discounts. This way, even when
people didn’t have much money to spend, they could still enjoy their favorite Starbucks drinks. They kept prices
fair, offered cheaper options, and ensured that Starbucks remained a go-to place for everyone—even when the
economy wasn’t looking so great.

2. Economic Ups and Downs:

• Economic Fluctuations: During times of economic downturns (e.g., the 2008 financial crisis),
 Starbucks adapted by introducing lower-priced options such as their breakfast deals and loyalty
programs. By offering affordable choices, they catered to customers with limited disposable income
while maintaining profitability.

• Global Supply Chain Management: Starbucks sources coffee beans from various countries (e.g.,
Ethiopia, Colombia), and fluctuations in exchange rates and labour costs impact its operations. Its
vertically integrated supply chain allows it to mitigate risks related to price volatility and ensure high-
quality products.

As Starbucks continued to grow, Howard saw that the world was becoming more health-conscious. "People are
more careful about what they eat and drink now," his team pointed out. So, Starbucks listened carefully to the
changing social trends.

Soon, they added healthier options to their menu, like almond milk and plant-based foods. Starbucks
customers could now enjoy their drinks guilt-free, knowing there were lower-calorie and dairy-free options. "It’s
not just about coffee anymore," Howard realized. "It’s about offering choices that fit into people’s lifestyles."

3. Social Changes and Health-Conscious Coffee Lovers:

• Changing Consumer Preferences: The rise of health-conscious consumers led Starbucks to expand
its menu by offering non-dairy milk options (almond, soy, oat), sugar-free syrups, and more plant-based
food items. This has helped Starbucks cater to diverse dietary preferences and stay relevant to health-
aware consumers.

• Social Responsibility: Starbucks is known for ethical sourcing and fair trade practices, ensuring they
work with farmers in a way that supports community development and sustainability. This has
enhanced its appeal to socially responsible consumers.

Howard also knew that technology was transforming the world around him. Everywhere he looked, people were
glued to their smartphones. "Why don’t we bring Starbucks into people’s phones?" he thought. His team
developed the Starbucks mobile app, allowing customers to order and pay for their coffee ahead of time. With
a tap of a button, customers could skip the line and grab their coffee on the go.

The app also tracked customer preferences, sending personalized offers through the loyalty program. This
helped Starbucks stay ahead of the game, using technology to make the customer experience smoother,
faster, and more convenient.

4. The Tech-Savvy Coffee Revolution:

• Mobile Ordering and Payment: Starbucks embraced technology by integrating mobile apps, enabling
customers to order and pay for their drinks ahead of time. This increased convenience and improved
customer experience. It also collects valuable data on customer preferences through the app, which
helps in personalizing offers and promotions.

• Digital Loyalty Programs: The introduction of the Starbucks Rewards program has been a significant
driver of repeat business. It encourages customer loyalty through discounts, promotions, and rewards
for frequent purchases.

But it wasn’t always smooth sailing. As Starbucks opened stores in different countries, they had to follow local
laws. “In some countries, we need to follow stricter health and safety regulations,” Howard’s team explained.
They ensured that all the food and drinks served in Starbucks were of top quality, and the stores followed all the
safety standards. They also treated their employees well, providing healthcare and other benefits, keeping in
line with local labor laws.

5. Legal Brews

• Health Regulations and Food Safety: Compliance with local food safety laws is crucial for Starbucks.
This includes ensuring the quality of its ingredients and compliance with health codes in each country.
Regular audits and adherence to safety standards have been key to avoiding legal challenges.

• Labor Laws: In various countries, Starbucks has had to comply with minimum wage laws and other
labour regulations. Starbucks offers benefits such as healthcare and education assistance to its
employees, helping it attract and retain talent in line with labour standards.

As Starbucks became a global brand, Howard noticed that customers were becoming more environmentally
conscious. They didn’t just care about their coffee; they cared about how it was made and where it came from.
Customers began asking questions like, "Are your coffee beans sourced ethically? Are you using plastic
straws?"

Starbucks took action. They introduced reusable cups, stopped using plastic straws, and invested in
sustainable farming practices to help coffee farmers around the world. They also designed "greener stores"
that used less water and energy. Starbucks wasn’t just about coffee anymore—it was about making the world a
better place for future generations.

6. A Greener Coffee Future

• Sustainability and Eco-friendly Practices: Starbucks has been a pioneer in sustainability efforts, such
as reducing plastic waste by eliminating plastic straws and investing in recyclable or reusable cups.
Their "Starbucks Greener Stores" initiative also focuses on making stores environmentally friendly by
reducing water consumption and energy use.

• Climate Change Impact on Coffee Supply: Climate change has had a direct impact on coffee
production, affecting the quality and availability of coffee beans. Starbucks has responded by investing
in sustainable farming practices and providing support to coffee farmers through the Starbucks Farmer
Support Centers.

How Starbucks Used External Environment Analysis to Succeed:

• Adaptability and Innovation: Starbucks’ ability to identify shifts in consumer preferences, such as the
demand for healthier options and eco-friendly practices, has allowed it to innovate continuously. They
have adapted their product offerings and business model to align with these trends.

• Global Expansion Strategy: By analyzing political and economic factors, Starbucks successfully
expanded into international markets like China, where they tailored their offerings to suit local tastes
while maintaining their brand identity.

• Technological Integration: Recognizing the impact of technology, Starbucks was one of the first
companies to leverage mobile apps and loyalty programs, which not only improved customer
experience but also increased repeat business.

• Sustainability Focus: With growing environmental concerns, Starbucks invested in sustainable

sourcing and eco-friendly store practices, which helped them gain the trust of socially conscious
consumers and differentiate themselves from competitors.

Conclusion:

Starbucks’ success can be attributed to its comprehensive analysis of the external environment and its ability
to respond to changing market dynamics. By recognizing the importance of political, economic, social,
technological, legal, and environmental factors, Starbucks was able to craft strategies that ensured long-term
growth and sustainability. Over the years, it has grown into a global leader in the coffee industry, offering a wide
variety of beverages, food items, and merchandise. This case study illustrates how effective external
environment analysis can lead to business resilience and success in a competitive global market.