Businesses do not operate in isolation. Managers need to understand the impact that the surrounding business environment has on their own organization.

Managers can use the STEP (social, technological, economic, and political) model to help identify the factors in the broader environment that will affect their business. This model groups the factors into these categories:

• Social – Social factors include trends that affect customers or employees: demographic changes, availability of skills, and so forth. For example, an aging population may affect demand for certain products.
• Technological – Technological factors include improved raw materials, better communication, and higher-quality equipment. These factors could mean the end of some traditional markets or products. For example, the Internet is now an important selling medium for companies.
• Economic – Economic factors include trends in people's employment status and incomes. Interest rates and influences such as inflation or economic growth are also significant. For example, concerns about layoffs may make some insurance products more attractive.
• Political – Political factors include domestic governmental policies and the impact of new legislation. These factors can be expanded to include the policies of other countries in which the business operates. For example, pending legislation may affect the company's products.

The STEP framework has the advantage of being simple and easy to apply. It is a useful tool that helps managers think about current influences on their organization and possible future changes.

Though it does not tell you what strategy to pursue, the STEP framework does help you consider all the external elements involved. Without such a framework, you might overlook or discount some external factors that should be considered.

Questions about external impact

To review the impact of all factors in the STEP model, managers should ask themselves these questions:

• Social
• • What public trends are affecting or may be about to affect our customer buying habits or our employee work patterns? How large is our potential market? What are the characteristics and values of this group?
• Technological
• • How could available or new technology enhance our product or service? Could new advances threaten or support development of our products or services?
• Economic
• • How much disposable income do our customers have? How confident are they in the economy? How financially stable is the business? Can the company afford to borrow to finance growth?
• Political
• • What legislation or regulations will affect our products or services and our relationships with our customers, suppliers, or employees? Is the government supportive of the industry?

Despite your best efforts to insure your business's success, the external business environment can have positive and negative effects on your organization. A comprehensive STEP analysis can help you to consider a variety of factors that may come into play.