Economic factors 

Organisations in all sectors are susceptible to broader economic forces, The state of the economy affects organisations in a number of ways, including: 

• Income streams. The health of the economy affects consumer and business spending, capital investment, tax revenues and the level of charitable donations. Economic recessions often lead to restrictions on public spending, bringing adverse effects on those industries and sectors which rely on government contracts, as well as on those who use public services and whose demand for the services may well be greater during such times of recession. 
• The nature of demand. Generally, increasingly affluent societies spend proportionately more on leisure and fashion than on household goods. 
• Inflation. This affects the balance between saving and spending by consumers and businesses. In some sectors increases in government funding have been below the rate of inflation, so that organisations have had to improve efficiency and/or reduce services. 
• Exchange rates. The rate between the major currencies affects the affordability of imports and exports, and hence their value to consumers and businesses. 
• The labour supply. Economic growth affects the demand for labour and the ability of organisations to recruit suitably qualified staff. 

Environmental factors 

Environmental issues have a growing impact on what customers want and how organisations behave. You may need to consider a number of factors: 

• Legislation. The main emphasis of the increasing environmental regulation is on pollution control and waste disposal, but it is also affecting packaging, transport and distribution, and sources of materials. 
• Information and reporting. Many customers and communities consider organisations' publicity and labels in assessing the value of goods and services, for instance looking for evidence of 'dolphin-friendly' tuna fishing methods. 
• Employees. Increasingly, employees are interested in and concerned about the environmental credentials of their employers. 
• Operational advantages. There are opportunities for organisations with high environmental standards to gain an advantage over other organisations in the eyes of the customer. This might be reduced energy costs, for example, or increased public and external support. 

Political factors 

Government policy and spending decisions have a major impact on most organisations in the public and private sectors. Some organisations have performance targets and measurements imposed directly on them by central or local government. 

Governments regulate what consumers of many products and services can buy, and where, how and for how much (because of indirect taxes), all of which affect customers' perceptions of value. The laws and regulatory frameworks which result from political processes have a huge impact on most organisations. 

In wider terms, the rise and fall of democracies or dictatorships and government policy in countries and regions across the world affect consumers: how many of them there are, what they want and are able to buy and what can be sold to or in other countries. 

Such political change also affects relationships with public and non-profit service organisations in other countries. 

The STEEP framework provides a useful structure for the discussion of the external environment. As you may well have noted, however, the distinction between the factors is rather artificial. Many political decisions have an economic impact, and almost all economic factors have a political dimension. Social behaviour is influenced by new technology, and in turn influences political decisions. 

Environmental issues have strong social, political and economic elements, and the implementation of environmentally acceptable solutions often depends on the adoption of new technology. 

It is important not to worry too much about how to classify external factors, but to be aware of how they may affect your organisation, your role and what customers value. 

Most organisations attempt to keep abreast of and sometimes to forecast changes in their external environment, and we consider this next. 

​In this blog we consider what managers need to be aware of in the environment beyond customers, suppliers and competitors, although you should still focus on maintaining and improving value to your customers as you think about this far environment.

Changes in the far, or external, environment can be both a threat and a source of opportunities to organisations. It follows that managers who can monitor and understand their far environments are likely to be more effective.

To be able to do this, you must understand the main elements of your organisation's far environment, and then improve your knowledge of them and how they are likely to affect your organisation arid the field in which it operates.

Even if you are not in a position to influence how your organisation responds to the far environment, understanding how it is changing can help you to manage some of the ways in which your organisation has chosen to respond.

We will look briefly at the range of factors in the far environment that can influence organisations, although of course which factors are important will vary between organisations. We will do this under the five headings of sociological, technological, economic, environmental and political factors (STEEP). Then we will look at what you can do to keep abreast of external changes that may impact on your organisation.

Sociological factors

We live quite differently from the way our parents did when they were our age, and we can see that the world in which today's children will live and work as adults will be different again. Sociological factors that are likely to affect organisations include demographic changes, patterns of work, household and social structure, morbidity and mortality, and gender roles, which may all influence changing social needs.

Demographic changes in the West, where both birth rates and death rates are declining, mean that the number of people of pensionable age in developed OECD countries will rise by 70 million by 2025, while the working-age population will rise by only 5 million (OECD).

This ageing of the population will affect the demand for consumer products and services and for the public and caring services provided by public and non-profit organisations the income, tax and donor base to fund them, and also the size of the workforce and the availability of labour.

Patterns of work continue to change. Few people entering the job market today expect lifelong employment with the same employer, and careers will often consist of several jobs and possibly periods of unemployment.

There has been a substantial growth in part-time jobs, most of them done by women. In most European countries the number of women in paid employment is now similar to the number of men. Household and social structures are very different now from the `typical' household consisting of two parents and one or more children.

The decline in traditional social structures based on class, religion and family has led to increasing mobility and freedom of choice. However, it has also created new social problems and issues, such as an increase in homelessness and a decline in traditional family support structures, with their impact on the services and products of many organisations.

​Technological factors Just as the industrial revolution altered the way people lived in previous centuries, moving them from rural areas to towns and creating new markets, customer needs and public services, so the information technology revolution may be doing the same in this century. The information revolution is leading to worlds of work and living substantially different from the ones we have been familiar with.

Changes in information and transport are:

• lowering the barriers of time and place; globalisation means that customers and suppliers are less geographically discrete and are easier to connect
• creating new ways of doing things and demands for new services
  
• transforming the nature of many internal service functions, such as secretary, finance officer, project manager, stores clerk and fundraiser, which are now based largely on IT systems
• changing patterns of social and economic inequality and marginalisation, as the impact of new technology is unevenly spread.

Next month we will look at Economic factors.

​So what do managers need to be aware of in the environment beyond customers, suppliers and competitors, while still focussing on maintaining and improving value to your customers as you think about this far environment?

Changes in the far, or external, environment can be both a threat and a source of opportunities to organisations. It follows that managers who can monitor and understand their far environments are likely to be more effective.

To be able to do this, you must understand the main elements of your organisation’s far environment, and then improve your knowledge of them and how they are likely to affect your organisation and the field in which it operates. Even if you are not in a position to influence how your organisation responds to the far environment, understanding how it is changing can help you to manage some of the ways in which your organisation has chosen to respond.

We will look briefly at the range of factors in the far environment that can influence organisations, although of course which factors are important will vary between organisations. We will do this under the five headings of sociological, technological, economic, environmental and political factors (STEEP).

Then we will look at what you can do to keep abreast of external changes that may impact on your organisation.

Sociological factors

We live quite differently from the way our parents did when they were our age, and we can see that the world in which today's children will live and work as adults will be different again. Sociological factors that are likely to affect organisations include demographic changes, patterns of work, household and social structure, morbidity and mortality, and gender roles, which may all influence changing social needs.

Demographic changes in the West, where both birth rates and death rates are declining, mean that the number of people of pensionable age in developed OECD countries will rise by 70 million by 2025, while the working-age population will rise by only 5 million (OECD).

This ageing of the population will affect the demand for consumer products and services and for the public and caring services provided by public and non-profit organisations, the income, tax and donor base to fund them, and also the size of the workforce and the availability of labour.

Patterns of work continue to change. Few people entering the job market today expect lifelong employment with the same employer, and careers will often consist of several jobs and possibly periods of unemployment.

There has been a substantial growth in part-time jobs, most of them done by women. In most European countries the number of women in paid employment is now similar to the number of men.

Household and social structures are very different now from the `typical' household consisting of two parents and one or more children. The decline in traditional social structures based on class, religion and family has led to increasing mobility and freedom of choice.

However, it has also created new social problems and issues, such as an increase in homelessness and a decline in traditional family support structures, with their impact on the services and products of many organisations.

Technological factors

Just as the industrial revolution altered the way people lived in previous centuries, moving them from rural areas to towns and creating new markets, customer needs and public services, so the information technology revolution may be doing the same in this century. The information revolution is leading to worlds of work and living substantially different from the ones we have been familiar with.

Changes in information and transport are:

• lowering the barriers of time and place - globalisation means that customers and suppliers are less geographically discrete and are easier to connect
• creating new ways of doing things and demands for new services
• transforming the nature of many internal service functions, such as secretary, finance officer, project manager, stores clerk and fundraiser, which are now based largely on IT systems
• changing patterns of social and economic inequality and marginalisation, as the impact of new technology is unevenly spread.

Next month we will look at economic factors…

Some important retailers in the food and clothing sectors have been referred to as ‘manufacturers without factories’. They so dominate their suppliers that they can dictate many trading conditions, from payment terms to production methods. If most of a supplier’s output goes to one retailer, the latter’s bargaining power is even greater. If, however, the supplier is one of only a very small number of sources of a particular service or product, that supplier has a stronger bargaining position with their customer.

Porter argued that organisations' competitive positions depended in part on the relative bargaining power of their suppliers and their customers.

Suppliers are powerful if some or all of the following apply:

• There are many small customers buying from only a few larger suppliers.
• They sell unique products or services.
• It costs the customer a lot to change to buying from another supplier (switching costs).
• They are not dependent on the fortunes of only one industry.
• They could start doing themselves what their customers do.

Customers are powerful if some or all of the following apply:

• They purchase in huge volumes.
• It is easy for them to buy alternatives from different suppliers.
• They have the financial power and purchasing systems that can secure good prices and high quality from their suppliers.
• What they are buying is of relatively little importance to what they sell.
• They could make the products or provide the services themselves if necessary.

​​The threat of substitute products or services The final force discussed by Porter is the threat of something new replacing the need for the services or products provided in a particular industry or sector. The replacement of mechanical dispensing machines with electronic ones is an instance of this, although sometimes whole industries can virtually disappear.

​Porter argued that as well as technological developments, there is a greater likelihood of substitute products or services when existing ones are generally perceived to be too costly or lacking in quality; this can apply in public as well as commercial sectors.

We arrived at the model of Porter's forces by extending the scope of market research to include the environment beyond your organisation, and more specifically the near, or competitive, environment populated by organisations whose actions your organisation influences and whose actions influence it.

Our aim here is not to move on to the strategic level of what an organisation should do to position itself in its competitive environment; rather it is to help you to be more aware of what to look out for in the near environment, and offer you a framework for thinking about your organisation's relationship with its competitors, suppliers, collaborators and customers.