The performance of any business organisation is determined by its internal and external environment, the internal factors can be controlled by the organisation. However, external factors such as government, competitors and global events can equally affect the performance of business to a large degree. It is always important as a business owner to be very conversant with your external environment for instance, in the world today there are several global events that has caused a lot of disruption in businesses such as the COVID 19, Climate Change, Russia-Ukraine War just to mention a few.
We cannot afford to fold our arms and say oh! This global event started in China and as such does not affect me here in Nigeria, the world is now a global place and one event happening in one country can affect another country. For instance, the Russia-Ukraine war has affected the whole world in three major areas such as wheat supply, Ukarine is the major producer of wheat in the world and ever since the war started it had disrupted the production and supply chain making wheat very expensive, how does it affect Nigeria? We use wheat and also flour is used for the production of bread and other baking products thus, we are now buying at a higher cost now which is why bread and other commodities experienced a hike in their prices.
Another area that has been affected by this global event is the Energy Sector. Russia is the largest producer of energy in the world and immediately the war started they cut supply of gas to Europe which has also affected Nigeria. Now, as a manager how does this global event affect you?
- Loss of Resources
- Disruption of Supply Chain: With this Russia-Ukraine War it has disrupted the supply chain of wheat.
- COVID 19: We experienced restrictions of movement, Loss of Employment, shut down of businesses.
Hence, as a manager, this tells you that external factors can affect your business. You must listen to everything going on in your environment. These global events affects our policies for example: Climate Change, people are beginning to go green and most people are producing a more environmental friendly product. Hence, these global events can affect our policies because government will change our national laws in line with global best practices and as a business you must comply with it.
National policies such as our regulatory policy, monetary policy which deals with the regulation of money in circulation which is controlled by Central Bank of Nigeria and Fiscal policy which deals with how government uses tax to regulate the economy through the ministry of finance. These policies affect our customers, competitors and all these affect our operating environment. Hence, if your revenue is going down there must be a reason that is why we must understand the environment in which we operate in. When your competition increases, what happens to your business? you will lose your market share and your revenue and if cost is maintained at the same level your profit will decline and you will start making a loss.
In order to explain those factors that affect the industry, there is the Porter’s five force model devised by Michael Porter, what are does things that affect competition in a particular industry. A framework for analysing the nature of competition within an industry. It helps us to understand and access industry profitability and attractiveness. According to Michael Porter, These are the five factors that can affect a business’s profitability beyond your control. Even if they are beyond your control, you must be aware of it to enable you plan your risk strategy.
- Threats of New Entrants: If we have very few players in the industry there would not be so much competition but take for instance bottle water industry, it is a very competitive market. Why? If the threat of new entrants is low, it is likely that the barrier to come in will be low.
- Bargaining power of Buyers: If the industry you play in they have few buyers, the buyers would have more say. Hence, when they fix the price they still have to work with the buyers.
- Bargaining Power of Suppliers same thing with the suppliers.
- Threat of substitutes: Are there alternatives? The cost of switching is it high or low.
- Intensity of competitive rivalry.
Team, T. (2022, October 21). Porter’s 5 forces explained and how to use the model. Retrieved October 25, 2022, from https://www.investopedia.com/terms/p/porter.asp