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Environmental Analysis

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A host of external factors influence a firm's choice of direction and action and, ultimately, its organizational structure and internal processes. These factors, which constitute the external environment, can be divided into three interrelated subcategories: factors in the remote environment, factors in the industry environment, and factors in the operating environment. There are complex necessities involved in formulating strategies that optimize a firm's market opportunities. There is an interrelationship between the firm and its remote, its industry, and its operating environments. In combination, these factors form the basis of the opportunities and threats that a firm faces in its competitive environment.

The remote environment (macroeconomic) comprises factors that originate beyond and usually irrespective of, any single firm's operating situation: (1) economic, (2) social, (3) political, (4) technological, and (5) ecological factors (Pearce & Robinson, 2004). Economic factors concern the nature and direction of the economy in which a firm operates. Because consumption patterns are affected by the relative affluence of various market segments, each firm must consider economic trends in the segments that affect its industry. On both the national and international level, managers must consider the general availability of credit, the level of disposable income, and the propensity of people to spend. Prime interest rates, inflation rates, and trends in the growth of the gross national product are other economic factors they should monitor (Pearce & Robinson, 2004).

There is difficulty in assessing the probable impact of remote, industry, and operating environments on the effectiveness of alternative strategies. Assessment of this kind involves collecting information that can be analyzed to disclose predictable effects. Except in rare instances, however, it is virtually impossible for any single firm to anticipate the consequences of a change in the environment; for example, what is the precise effect on alternative strategies of a 2 percent increase in the national inflation rate, a 1 percent decrease in statewide unemployment, or the entry of a new competitor in a regional market? (Pearce & Robinson, 2004).

The area in which my company operates is the healthcare industry. Many of the complaints about the increase in the cost of health care over the past few years are misdirected. The costs of things that do not change in quality (syringes, bandages, etc.) have surely gone up. The number of Americans - employed and unemployed - without health care coverage is growing. The cost of health insurance is going up, as are medical expenses. Too many Americans, children and the elderly among them, simply cannot afford the medical help they need. There are many economic variables that affect the healthcare industry as a whole. Some of these variables are inflation, medical insurance costs, unemployment, interest rates and competition.

(Graph 1)

(Graph 2)

2001 2002 2003 2004 2005

Unemployment Rate

(percent) 4.700 5.800 6.000 5.500 5.100

(Graph 3).

These charts show that even though healthcare costs and unemployment rates are considerably high and Americans have adjusted to the increasing inflation and unemployment rates.

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