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External Factors Affecting Business

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External Factors Affecting Business

A business can't operate on its own. Outside the office walls, there are multiple factors that can dictate its performance. Some examples include new technology and changes in taxes, interest rates, or minimum wages. In business terms, these are called external factors. Read on to find out how external factors influence business and how companies can adapt to the ever-changing external environment.

External factors affecting the business meaning

There are two types of factors influencing business decisions: internal and external. Internal factors are elements that come from within or are under a company's control, e.g. human resources, organisational structure, corporate culture, etc. External factors, on the other hand, are elements that come from outside, e.g. competition, new technology, and government policies.

External factors are factors from outside the company that can affect a business's performance.

External factor types and Objectives affecting business

There are five main types of external factors:

  • Political

  • Economic

  • Social

  • Technological

  • Environmental

  • Competitive.

Use the acronym PESTEC to memorise this better!

The external factors affecting business decisions, External Factors, StudySmarterFigure 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 influence on business and examples

This 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.

External factors affecting business, types of business law, StudySmarterFigure 2. Types of business laws - StudySmarter

Economic influence on business and examples

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.

One measure of economic performance is aggregate demand. Aggregate demand is the total demand for goods and services within an economy (including consumer and government spending, investing, and exports, minus imports). The higher the aggregate demand, the more robust an economy is. However, too much demand can lead to high inflation, resulting in higher prices for consumers.

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 influence on business

Social influence on business refers 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.

Technology influence on 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.

External factors affecting business technological, StudySmarterFigure 3. Areas of technology that impact business - StudySmarter

Automation is the use of robots to perform repetitive tasks formerly done by humans.

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

The manufacturing of cars and trucks is carried out by big, automated robots instead of human workers. These robots can perform a wide range of tasks including welding, assembling, and painting. With automation, production becomes safer, more efficient and more accurate. Companies can hire fewer workers for menial work and focus more on quality-improving activities.

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

E-commerce is the buying and selling of goods and services on the internet.

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.

Digital media are online channels that get businesses in contact with their customers.

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 influence on 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 influence on 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.

The competitive advantage of Starbucks is that it is a global company with strong brand recognition, premium product quality, and a cosy environment that makes customers feel at home. Starbucks is not only a coffee store but a place where you hang out and have a good time with friends and family.

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.

Before 2007, the world was oblivious to the 'swipe and touch' device, as the mobile phone industry was dominated by Nokia. The introduction of touch screens by Apple changed all of this. Nowadays, most people own a smartphone and spend countless hours communicating, working, and entertaining via their mobile devices. The increased mobile usage also forces companies to adapt sales and marketing tactics to be more mobile-friendly.

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.

Corporate Social Responsibility (CSR) refers to the positive contribution of a company to the environment, economy, and community.

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.

Starbucks's CSR: Starbucks aims to create a positive impact on the communities it works with by partnering with local non-profit organisations. For each partner, Starbucks donates $0.05 to $0.15 per transaction. The company also provides jobs for veterans and military workers while emphasising diversity and inclusion in the workplace.

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.

External factors affecting business decisions - Key takeaways

  • External factors are factors from outside that can affect a business's performance.
  • There are five main types of external factors:
    • Political factors
    • Economic factors
    • Social factors
    • Technological factors
    • Environmental factors
    • Competitive factors.
  • External factors are changing the business landscape at an accelerating rate, and companies that fail to keep up will end up getting replaced by others.
  • To manage changes in the external environment more efficiently, companies should invest in their internal resources and corporate social responsibility (CSR).

Frequently Asked Questions about External Factors Affecting Business

External factors affect business performance as external factors are changing the business landscape at an accelerating rate, and companies that fail to keep up will end up getting replaced by others. o 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.  

External factors are factors from outside the company that can affect a business's performance, e.g. competition, new technology, and government policies.  

Some examples of business external factors are competition, new technology, and government policies.   

There are five main types of external factors:  


  • Political

  • Economic

  • Social

  • Technological 

  • Environmental

  • Competitive.

External factors affect business strategic goals as changes in the external environment bring both opportunities and challenges for businesses.  

Final External Factors Affecting Business Quiz

Question

What are business external factors?

Show answer

Answer

Business external factors are factors from outside that can affect a business's performance. 

Show question

Question

What does PESTEC stand for?

Show answer

Answer

PESTEC stands for political, economic, social, technological, environmental, and competitive influence on business. 

Show question

Question

What is political influence on business?

Show answer

Answer

Political influence on business refers to new legislation being launched in a country that affects consumers, employees, and businesses' rights. 

Show question

Question

Give some examples of business legislation!

Show answer

Answer

  • Anti-discrimination 
  • Intellectual property
  • Minimum wage
  • Health and safety 
  • Competiton 
  • Consumer protection

Show question

Question

Name three type of business law!

Show answer

Answer

  • Consumer law
  • Employee law
  • Intellectual property law

Show question

Question

What are some factors that can affect the economy?

Show answer

Answer

Tax rates

Show question

Question

What is aggregate demand and how does it affect the economy?

Show answer

Answer

Aggregate demand is the total demand for goods and services within an economy (including consumer and government spending, investing, and exports minus imports). 


Higher aggregate demand indicates a more robust economy. However, too much demand for goods and services can result in higher prices for consumers or inflation.

Show question

Question

What is social influence on business?

Show answer

Answer

Social influence on business refers to changes in consumer tastes, behaviour or attitude that might affect business sales and revenues. 

Show question

Question

Give an example of social influence on business. 

Show answer

Answer

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. 

Show question

Question

What is an ethical business?

Show answer

Answer

An ethical business is one that considers the needs of all stakeholders, not just owners.

Show question

Question

Give some examples of technology that have a significant impact on business. 

Show answer

Answer

  • Automation - used in manufacturing
  • E-commerce - used for online transactions
  • Digital media - used for promotion, advertising, and customer communications.

Show question

Question

What is environmental influence on business?

Show answer

Answer

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

Show question

Question

Name some 'green' solutions a business can adopt to reduce its impact on the environment. 

Show answer

Answer

  • Recycling packaging
  • Offsetting carbon footprint
  • Introducing energy saving plans
  • Adopting more energy-efficient equipment 
  • Switching to fair-trade suppliers

Show question

Question

What are competitive advantages?

Show answer

Answer

Competitive advantages are attributes that allow the company to outperform its rivals

Show question

Question

What can a business do to manage changes in the environment?

Show answer

Answer

To manage changes in the external environment more efficiently, companies should invest in their internal resources and corporate social responsibility (CSR). 

Show question

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