External Factors Affecting Business

External factors affecting business

There are five main types of external factors affecting business:

• Political

• Economic

• Social

• Technological

• Environmental

• Competitive.

Figure 1. Business External Factors - StudySmarter

External factors can have both positive and negative impacts on business operations. To sustain profitable growth, companies need to constantly monitor environmental changes to adapt and minimise their negative consequences.

Political factors affecting business

Political influence on business refers to new legislation that affects consumers', employees, and businesses' rights.

Some examples of business-related legislation include:

• Anti-discrimination

• Intellectual property

• Minimum wage

• Health and safety

• Competiton

• Consumer protection.

Generally, these are grouped into three categories:

• Consumer laws - These are laws that ensure businesses will provide consumers with quality goods and services.

• Employment laws - These are laws that protect employee rights and regulate the relationship between employees and consumers.

• Intellectual property law - These are laws that protect creative work within the business world, e.g. copyrights of music, books, films, and software.

Figure 2. Types of business laws - StudySmarter

Economic factors affecting business

Businesses and the economy have a mutual relationship. The success of businesses results in a healthier economy, whereas a strong economy allows businesses to grow faster. Thus, any changes in the economy will have a significant impact on business development.

Economic activities can deeply be affected by changes in:

• Tax rates

• Unemployment

• Interest rates

• Inflation.

Changes in tax, interest rates, and inflation can result in a rise or fall in aggregate demand, which affects economic activity. For example, with lower taxes, individuals and households have more income at their disposal to spend on goods and services. This contributes to higher demand, resulting in more production and jobs created. As a result, business activities grow and the economy flourishes.

Social factors affecting business

Social factors affecting business refer to changes in consumer tastes, behaviour, or attitude that might affect business sales and revenues. For example, nowadays, consumers are paying more attention to environmental issues such as climate change and pollution. This puts pressure on firms to adopt eco-friendly solutions to their production and waste disposal.

Social influence also includes the ethical side of a business, such as how a company treats its employees, consumers, and suppliers.

An ethical business is one that considers the needs of all shareholders, not just owners. Typically, business ethics comprise three main aspects:

• Employees - Ensure work-life balance as well as the physical and emotional well-being of the employees.

• Suppliers - Stick to the agreed contract and pay suppliers in a timely fashion.

• Customers - Provide quality products at a fair price. Businesses should not lie to consumers or sell products that do serious harm to consumers.

In a perfect world, companies would comply with all ethical policies and contribute to the betterment of society. However, in reality, this is unlikely to happen, as ethics tend to be at the opposite end of profitability. For example, a company that paid everyone a living wage might end up with lower profits.

Technological factors affecting business

Technology is used extensively in modern business, from production to product selling and customer support. Technology allows a company to save time and labour costs while achieving more efficiency, which, in the long run, can result in a competitive advantage.

Three key areas of technology in business are automation, e-commerce, and digital media.

Figure 3. Areas of technology that impact business - StudySmarter

Automation is applied throughout the supply chain of many industries, including electronics manufacturing, automotive, retail, online services, banks, etc.

In addition to automation, there is a trend towards e-commerce.

Many companies set up an e-commerce shop to accompany their brick-and-mortar stores, while others operate 100% online.

Some examples of e-commerce include:

• An online bookstore

• Buying and selling through Amazon or eBay

• An online retailer.

The key incentive for businesses to move online is to reduce fixed costs. While physical businesses have to pay healthy monthly fees for rent, warehousing, and electricity on-site, an online business pays little to no fixed costs.

For example, an Etsy shop selling cooking recipes and printables can avoid costs of warehousing, hiring workers to work on-site, and renting out a location. Without the burden of fixed costs, the business owner can focus more on product development and promotion.

Finally, there is the extensive use of digital media.

Some examples include websites, blogs, videos, Google ads, Facebook ads, emails, social media, etc.

While traditional marketing methods like billboards and banners are restricted to local areas, online channels allow companies to communicate their marketing messages across the globe in a matter of seconds.

Environmental factors affecting business

Environmental influence refers to changes in the natural world, such as weather conditions, that might affect business operations.

The production of goods and services is the major cause of climate change, pollution, and waste. For example, the generation of electricity in coal-fired plants releases a tremendous amount of carbon dioxide into the atmosphere, which causes global warming and acid rain. The fashion industry is another CO2 emitter, contributing to around 8-10% of the total greenhouse gas emission each year.

The good news is that many companies nowadays have been adopting eco-friendly solutions to mitigate their impacts on the environment. Some examples include:

• Recycling packaging

• Offsetting carbon footprint

• Introducing energy-saving plans

• Adopting more energy-efficient equipment

• Switching to fair-trade suppliers.

Competitive factors affecting business

Competitive influence refers to the impact of competition in the business environment. The impact can come from changes in price, product, or business strategy. For example, if a company selling similar products at a similar price to your business suddenly drops its price to attract more customers, you may have to reduce the price as well or risk losing customers.

To avoid the impact of competitive influence, a company can develop competitive advantages. These are attributes that allow the company to outperform its rivals. A business can gain a competitive advantage by investing in a high-quality labour force, exceptional customer support, stellar products, extra services, or a reputable brand image.

How do changes in the external environment affect business?

In the modern world, external factors are changing at a rapid rate, causing competition to become more intense than ever. Businesses that underestimate competition or are too slow to adapt will get replaced by more innovative firms.

Changes in the external environment are often caused by:

• A shift in consumer behaviour

• Introduction of new technology

• Entry of new competition

• An unpredictable event such as war, economic crisis, global pandemic, etc.

• Adoption of new legislation, e.g. tax policy, minimum wage.

Changes in the external environment bring both opportunities and challenges for businesses.

For example, the emergence of online marketing channels such as Facebook and Google ads allows businesses to market and sell their products more effectively. However, their competitors will also have access to the exact same tools and customer base.

To gain a competitive advantage, businesses cannot rely solely on external technology. They need to invest in their own assets such as internal databases, human resources, and intellectual property.

Another way to gain this advantage is to become more socially responsible.

With the external environment changing and the business landscape being taken over by technology, businesses stand a better chance if they are seen in a positive light. This does not mean companies should put on a show. Instead, they should put in a genuine effort to better society.

Some CSR activities include reducing carbon footprint, allocating part of the profit to developing economies, purchasing eco-friendly materials, and improving labour policies.

As you can see, there are many external factors influencing businesses operations, including globalisation, technological, ethical, environmental, economic, and legal influences. These factors are changing all the time, and to survive, businesses must adapt and react to these changes. Failing to do so will put them at the risk of losing customers and closing down.