Management turnarounds: the external elements. (Selected Topic).(economic theory)

Introduction

As discussed in Section One (January 2003 Business Credit), the internal environment contains the controllable elements in a business. The external environment is not controllable and consists of elements that can be influenced in some instances. Understanding and adapting to the external uncontrollable elements is essential for business success.

Elements of the External Environment

There are many external elements that can negatively affect a business, such as increased competition, rapidly changing technology and economic fluctuations. Within these elements, you will find, among other things, foreign competition, capital markets movements, legal contrasts and non-responsive political solutions. A change in an external uncontrollable element will be felt by all businesses in an industry, but the impact these changes have on a specific business depends on the strength and stability of the management team.

A major problem with predicting the movement of uncontrollable elements is their interaction with each other. External elements are closely interrelated, and consequently, anything affecting one element can have a secondary effect on another element. For example, a cultural/social change in our society can result in a legal/political change. These adjustments can affect our economic environment, which can lead to changes in technological developments. The development of technology, in turn, can affect the level of competition. These interactions prove circular when you realize the status of competition then affects our economy, culture and society. (See Exhibit 3.)

Many managers do not realize that they can plan for changes in the external environment to safeguard their businesses, Foresight is essential in order to adapt to changes in the external environment. For example, consider a company that thrives on the sale of a single line of computer software. If this company does not begin developing new products or improve its existing product, it will quickly be shut out by the competition.

Producing single or narrow-lined products with no concentration on new product development severely limits a business's ability to compete. This is true especially when external changes, such as technological discoveries, inspire competitors to improve existing products or to create newer, more effective ones.