This article will discuss external factors affecting the business organization.
All businesses operate within an environment, which can be either internal or external. The external environment comprises elements beyond a business’s control, such as political, economic, and social factors.
To survive, businesses must understand these external factors and adjust accordingly.
Recognizing the influence of external factors on businesses is crucial for sustaining their operations.
External Factors Affecting the Business Environment
External factors can have a significant impact on a business. These factors can vary depending on government regulations, macroeconomic indicators, and the social or demographic nature of the environment.
Businesses use various tools to identify these external factors, with PESTEL and SWOT analysis being the most commonly used techniques.
External Factors in PESTEL Analysis
PESTEL analysis defined six external factors that can affect a business. These factors are:
- Political
- Economic
- Social
- Technological
- Environment
- Legal
#1. Political Factors Affecting the Business
When a country has political stability, it allows for more predictable policies, as opposed to a constant change of government, which often results in the annulment of existing laws and the enactment of new ones. This can significantly affect joint ventures (JVs) between private and national industries. If the political environment is unstable, it can negatively impact the smooth running of the agreement between both parties.
The war between Ukraine and Russia exemplifies how political events can affect businesses. This conflict has influenced the price of crude oil, which has significant implications for refinery operators and marketers.
Additionally, bilateral government relationships are another political factor that can impact businesses.
#2. Economic Factors Affecting the Business
Businesses are often concerned with economic factors such as bank lending, inflation, and exchange rates, as they can attract or discourage investment. For example, if inflation is high, it can reduce the purchasing power of money and disposable income, ultimately affecting the patronage of businesses. Similarly, if bank lending rates are high, businesses will have limited access to loans, which can restrict growth and expansion. This high lending rate can limit access to the capital needed to start a business.
The level of employment is also an external factor that businesses consider. Low employment levels can lead to cheaper labor, reducing business costs. On the other hand, high employment levels can lead to increased competition for labor, which can drive up labor costs.
Exchange rates are another external factor that businesses must consider, especially those that rely on foreign trade. If the exchange rate is high, the business must pay currency conversion costs, which can affect the cost of doing business and the price of goods and services.
#3. Social Factors Affecting the Business
People have their preferences in every society, and trends are ubiquitous. Lifestyle and fashion can also have a significant impact on businesses. If a business identifies an opportunity in a trend, it can tailor its products and services to capture the market. Social media can channel advertising to the business’s target audience.
A growing population, especially with a larger proportion of middle-aged or youthful individuals, can present business opportunities in sports, education, entertainment, and other industries to create and capture value. Banks and other institutions can also examine how to harness demographic changes to their business advantage.
#4. Technological Factors Affecting the Business
We are in a digital era, and many businesses utilize digital technology to reduce costs and serve customers more effectively. Artificial intelligence (AI) and machine learning are commonly used to analyze and predict customer preferences and gain insights into the market when customers interact with a company’s website. Amazon, for instance, uses AI technology to learn user behavior and suggest products to customers.
The use of technology has also allowed businesses to explore video conferencing, remote working, and real-time data analysis, leading to significant savings in travel and other logistics costs. Online flight ticket booking has helped airlines reach customers directly and offer unique and personalized services. Online payment has helped grow eCommerce, making business transactions fast and secure.
In the medical industry, there is a prediction of the emergence of eDoctors, where patients can interact with doctors virtually and receive medical services. Technology has significantly impacted businesses, particularly in the PESTEL model.
#5. Environmental Factors Affecting the Business
The impact of weather, climate change, and pollution on businesses is a significant consideration. The world is increasingly advocating for a greener environment, biodiversity, and conservation of natural resources. Hazardous business activities, such as oil spillage, gas flaring, exhaust fumes, and noise, have contributed to environmental degradation. This has created a need for environmentally friendly operations, and businesses must focus on environmental sustainability.
This is where the ESG criteria come in. ESG stands for Environmental, Social, and Governance and is used in investment decision-making. Companies that rate high on ESG may receive more funding than those with low ESG ratings.
Some businesses are adopting sustainable practices such as using sustainable aviation fuel, electric vehicles, and other eco-friendly measures to conform to sustainable development. Customers and stakeholders are increasingly rating companies on their environmental sustainability practices. While these greener measures involve additional capital than traditional fossil fuels, such companies earn reputation and brand awareness.
#6. Legal Factors Affecting the Business
Legal factors refer to the laws and regulations that govern business activities within a particular jurisdiction. A recent example is the Petroleum Industry Act (PIA), recently signed into law in Nigeria, which regulates all fiscal and regulatory demands of the oil and gas industry.
Oil and gas businesses in Nigeria must operate within the provisions of the law. Favorable legal provisions can lead to business growth and investment in the industry. Therefore, business analysts need to consider the legal implications of any business, as every business exists within the jurisdiction of the law.
Flouting legal provisions can lead to penalties and fines, disrupting business operations and profitability. Thus, studying fiscal provisions is crucial to identify opportunities, such as tax incentives, that businesses can leverage.
External Factors in SWOT Analysis
SWOT analysis is another tool that businesses can use to analyze factors that affect their operations. Unlike PESTEL analysis, which considers only external factors, SWOT analysis considers external and internal factors.
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and weaknesses are internal, while opportunities and threats are external.
Opportunities can arise anytime, and businesses must be prepared to exploit them. Similarly, threats can emerge from external factors, and businesses should be ready to deal with them. Through SWOT analysis, businesses can identify their strengths, weaknesses, opportunities, and threats and make strategic decisions to improve their operations.
Examples of External Factors that Affect Businesses
- Economic Factors: In 2020, Nestle reported declining sales growth due to reduced product demand in certain markets, such as Europe and Asia. Conversely, Apple experienced a boost in sales during the COVID-19 pandemic as consumers turned to their products for remote work and entertainment.
- Political Factors: In 2019, Nestle faced criticism for purchasing palm oil from suppliers accused of deforestation and human rights violations. This led to some consumers boycotting Nestle products and increased pressure on the company to improve its supply chain practices. Similarly, Apple faced criticism over worker conditions at its suppliers’ factories in China.
- Technological Factors: Apple has been successful due to its innovation and introduction of new and useful products. However, the company faces challenges in maintaining its market share in the smartphone market due to the emergence of competitors such as Samsung and Huawei, who offer similar features at lower prices.
- Social Factors: Nestle has faced criticism over its marketing of baby formula in developing countries, with critics blaming it for discouraging mothers from breastfeeding and putting infants at risk. Apple has also faced criticism for its high prices, which make its products inaccessible to certain demographics.
- Environmental Factors: Nestle and Apple have faced criticism over their environmental impact, particularly regarding packaging and waste. Nestle has pledged to use more sustainable packaging materials, while Apple has attempted to reduce its carbon footprint and increase the use of recycled materials in its products.
Conclusion
External factors that affect a business environment are beyond the control of the business and can present both opportunities and threats. It is essential for businesses to periodically consider these factors to take advantage of opportunities or mitigate potential threats.