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External Environment

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Business Studies

The external environment of a business, also known as the macro environment, includes all factors outside the reach of the business, that can impact the operations of the business. External factors influence the choices a business makes, as they determine opportunities and risks. Let's take a look at these different factors in more detail.

External business environment

All businesses are impacted by their external environment. Sometimes a business has to act upon and react to what happens outside of the scope of its operations. These external influences are known as external factors. Multiple different factors can influence a business's external environment. These factors are often unpredictable and can change suddenly.

The external environment plays a huge role in the types of strategies and actions a business decides to implement. The external environment can affect competitiveness, budgeting, decision making, and the marketing mix.

The external environment plays a huge role in the types of strategies and actions a business decides to implement. The external environment can affect competitiveness, budgeting, decision making, and the marketing mix.

The main external factor that influences business most is competition.

Competition is the degree to which businesses compete with one another in the market.

Most businesses, especially when operating in a popular industry, will have to face intense competition. The amount and type of competition mostly depend on the industry a business operates in. Although competition is one of the most significant factors, several other external aspects affect the strategies and actions taken by a business.

External environmental factors

Four main components make up the external environment of businesses. These are the main external factors you have to consider when operating a business.

Economic factors

Several economic factors can influence the business environment. One of them is market conditions. Size and growth rates are good indicators of market conditions. Market conditions are made up of many different economic elements that affect the attractiveness of a market. For instance, good market conditions can be described by economic growth and increasing market demand. Economic growth measures the value of output in a country's economy. One way you can measure economic growth is through Gross Domestic Product (GDP). This is the total value of all finished goods and services produced in a country's economy during a given period. Another factor is market demand, which measures how much of a good or service consumers are willing and able to pay for.

Demographic factors

Demographic factors are related to the population. For instance, an increase in the size of a population will most likely lead to an increase in demand for goods and services, as there are more potential consumers. Changes in the age of a population will also have significant influences on businesses.

An ageing population (more old people) will have different demands than a younger population. Older consumers tend to want and need different goods and services than young people.

Environmental and social factors

Society increasingly expects higher standards of environmental and sustainability-related awareness from businesses. Unfortunately, a lot of businesses contribute significantly to the creation of environmental damage.

Some governments have stepped up in this regard, passing certain legislation in order to protect the environment. Many governments impose quotas on the amount of harmful substances firms can emit within a timeframe, and fine businesses that over-pollute or ignore the legislation. These legislations are there to force firms to take into account the social costs (the cost to society and the environment) of production.

External environment analysis

A useful tool for analysing the external environment of an organisation is 'PESTLE'. PESTLE analysis takes a look at six different external factors that could have an impact on your business and rates the intensity and importance of each. PESTLE stands for political, economic, social, technological, legal, and environmental/ethical factors.

A useful tool for analysing the external environment of an organisation is 'PESTLE'. PESTLE analysis takes a look at six different external factors that could have an impact on your business and rates the intensity and importance of each. PESTLE stands for political, economic, social, technological, legal, and environmental/ethical factors.

External Environment, external environment analysis, Pestle factors, StudySmarterPESTLE factors. StudySmarter

Political

The 'P' in PESTLE. Political factors play a huge role for businesses operating in certain industries. Political factors include:

  • Political stability

  • Government stability

  • Industry regulations

  • Competition policy

  • Trade union power

Economic

The first 'E' in PESTLE. As outlined earlier, economic and market factors can significantly impact business functions. Some economic factors to consider include:

  • Interest rates

  • Inflation rates

  • Unemployment

  • GDP and GNP trends

  • Investment levels

  • Exchange rates

  • Consumer spending and income

Social

The 'S' in PESTLE. These socio-cultural factors include:

  • Demographics

  • Lifestyles and lifestyle changes

  • Education levels

  • Attitudes

  • Level of consumerism (how important consumption of goods and services is to people of a certain demographic)

Technological

The 'T' in PESTLE. Technology, especially in today's society, plays a huge role in business development and decisions. With technology developing rapidly, here are a few factors to keep in mind when considering the external environment of the business:

  • Levels of government and industrial R&D investment

  • Disruptive technologies

  • New production processes

  • Big data & AI

  • Speed of technology transfer

  • Product life cycles

Legal

The 'L' in PESTLE stands for legal considerations regarding the external environment of a business. These include:

  • Trade policies

  • Legislative structures

  • Employment legislation

  • Foreign trade regulations

  • Health and safety law

Environmental/ethical

Finally, the second 'E' stands for environmental and ethical factors. These include:

  • Sustainability laws

  • Tax practices

  • Ethical sourcing

  • Energy supply

  • Green issues

  • Carbon emissions and pollution

Check out Strategic Analysis for more on these topics.

External Environment - Key takeaways

  • All businesses are impacted by their external environment. Sometimes a business has to act upon and react to what happens outside of the scope of its operations.
  • The external environment, also known as the macro environment, is out of the control of an individual business.
  • Factors like competition, market, economic, demographic, and environmental factors all play a role in the external environment of an organisation.
  • Market factors are measured based on market conditions and demand, or the size and growth of the market.
  • Economic factors include interest rates and income levels of the population.
  • Demographic factors are related to the size and age of the population.
  • Environmental factors are related to levels of emissions and the social responsibility of firms.
  • An effective tool for analysing the external environment is a PESTLE analysis.
  • PESTLE evaluates political, economic, social, technological, legal, and environmental and ethical factors.

External Environment

The external environment of a business includes a group of factors that are outside the direct control of the business but can still have a large impact on the business. All businesses are impacted by their external environment. Sometimes a business has to act upon and react to what happens outside of the scope of its operation. The external environment includes political, economic, and environmental factors. 

The external environment of a business, also known as the macro environment, includes all factors outside the reach of the business, that can impact the operations of the business. External factors influence the choices a business makes, as they determine opportunities and risks. Businesses often have to modify or come up with completely new strategies due to changes in external factors. 

Final External Environment Quiz

Question

Name a model used to analyse the external environment.

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Answer

PESTLE analysis can be used to conduct external environment or macro analysis. PESTLE takes a look at six different external factors that could influence the organisation.

Show question

Question

Which one of the following factors is not included in the PESTLE analysis?

  1. Political factors 

  2. Enterprise factors

  3. Technological factors

  4. Legal factors

Show answer

Answer

B.

Show question

Question

List the different components of the PESTLE analysis with an example of each.

Show answer

Answer

  • PESTLE evaluates political, economic, social, technological, legal, environmental and ethical factors.

Examples:

  • Political stability 

  • Inflation rates

  • Lifestyle changes

  • Disruptive technologies

  • Legislative structure

  • Sustainability

Show question

Question

Which one of the following factors are not related to the external environment?

  1. Political stability 

  2. Economic growth

  3. The business' competitors 

  4. The business' operational strategy

Show answer

Answer

D.

Show question

Question

What do the two 'E's stand for in PESTLE?

  1. Enterprise and Economic

  2. Expenditure and Environmental

  3. Expenditure and Economic

  4. Environmental and Economic 

Show answer

Answer

D.

Show question

Question

Name some of the social factors that are attributed to the external environment.

Show answer

Answer

  • Demographics
  • Lifestyles and lifestyle changes
  • Education levels 
  • Attitudes 
  • Level of consumerism (how important consumption of goods and services is to people of a certain demographic)

Show question

Question

Name some of the technological factors that are attributed to the external environment.


Show answer

Answer

  • Levels of government and industrial R&D investment 

  • Disruptive technologies

  • New production processes 

  • Big Data & AI

  • Speed ​​of technology transfer 

  • Product life cycles

Show question

Question

How would you define the concept of a business's external environment?


Show answer

Answer

The external environment of a business includes a group of factors that are outside the direct control of the business but can still have a large impact on the business. All businesses are impacted by their external environment. Sometimes a business has to act upon and react to what happens outside of the scope of its operation. The external environment includes political, economic, and environmental factors.

Show question

Question

Why is the external environment important?


Show answer

Answer

The external environment of a business, also known as the macro environment, includes all factors outside the reach of the business, that can impact the operations of the business. External factors influence the choices a business makes, as they determine opportunities and risks. Businesses often have to modify or come up with completely new strategies due to changes in external factors.

Show question

Question

What is demand?


Show answer

Answer

The amount of a product or service that customers are willing and able to purchase.

Show question

Question

How do demographic factors influence a business's external environment?


Show answer

Answer

The size and age of a population can have important effects on businesses. An increase in the size of a population will most likely lead to an increase in demand for goods and services, as there are more potential consumers. Changes in the age of a population will also have significant influences on businesses. For instance, an ageing population (more old people) will have different demands than a younger population.

Show question

Question

What is fair trade?


Show answer

Answer

Fair trade is an arrangement between companies in developed economies and emerging economies to help achieve sustainable agreements. It exists to provide fair pay and working conditions for producers in emerging markets.

Show question

Question

What can governments do to help protect the environment from high-emission businesses?


Show answer

Answer

They can pass certain laws and regulations to protect the environment. Many governments impose quotas on the amount of harmful substances firms can emmit within a timeframe and fine businesses that over pollute or ignore the legislation. These legislations are intended to force firms to take into consideration the social costs (or the cost to society and the environment) of production.

Show question

Question

What are some of the ways in which businesses are damaging the environment?


Show answer

Answer

  • Emitting harmful gases, like carbon dioxide, as a result of their production process. 
  • Transporting raw materials or finished goods by cars, trucks, and planes. These vehicles travel long distances and are responsible for most carbon dioxide emissions. 
  • Polluting seas, oceans, rivers, and lakes by using the large bodies of water as a dumping ground. This not only pollutes nature but also destroys marine life.

Show question

Question

Which of the following statements are correct?

I. The external environment is separate from the business and therefore should not be considered when creating new strategies.

II. The external environment includes political factors, whereas the macro-environment only includes economic factors. 

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Answer

Neither of the two statements are correct. 

Show question

Question

The external environment can affect competitiveness, budgeting, decision making, and the marketing mix.

Show answer

Answer

True

Show question

Question

Define competition

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Answer

Competition is the degree to which businesses compete with one another in the market. 

Show question

Question

A popular industry tends to have a high level of competition. 

Show answer

Answer

True

Show question

Question

What are the indicators of market conditions?

Show answer

Answer

market size and growth rate

Show question

Question

Good market conditions can be described by ... market demand and economic growth.

Show answer

Answer

increasing

Show question

Question

What can be used to measure economic growth?

Show answer

Answer

  • GDP - Gross Domestic Product
  • Market demand

Show question

Question

What is GDP?

Show answer

Answer

GDP is the total value of all finished goods and services produced in a country's economy during a given period.

Show question

Question

What would happen to the demand for goods and services when the size of a population increases?

Show answer

Answer

The demand for goods and services will grow as there are more potential customers.

Show question

Question

Give an example of government legislation to protect the government.

Show answer

Answer

Set a quota on the amount of harmful substances firms can emit within a timeframe.

Show question

Question

Define social costs

Show answer

Answer

The cost to society and the environment caused by individual or business activities

Show question

Question

Give examples of environmental factors affecting a business

Show answer

Answer

  • Sustainability laws

  • Carbon emissions and pollution
  • Energy supply
  • Green issues

Show question

Question

Which of these are considered an economic factor influencing a business?

Show answer

Answer

product life cycle

Show question

Question

Demographic factors are related to the size and age of the population.

Show answer

Answer

True

Show question

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