External factors affecting businesses
This detailed article aims to identify and examine the key external factors affecting businesses. Certainly, there are a number of external factors that businesses need to identify and keep close eyes on. These could be social, economic, political, or even natural factors. As businesses cannot control these factors, it is very important to recognise them and take the necessary precautions when necessary.
Political factors affecting businesses
Political factors can affect the business environment significantly. For example, events such as elections and referendums can have effects on stock prices. This happens because investors are likely to take note of any political developments and respond accordingly.
Government policy on trade and taxation directly affect businesses and can have a significant impact on their revenue. For instance, if a government introduces a tax on imports, this will have an impact on businesses that import goods and services.
Governments can increase or reduce corporation tax which will impact on profits. They can also increase VAT or business rates (BBC, 2022). Apart from the government policies, businesses also need to consider political instability. The economy of any country may be affected badly if it were to be engulfed by political turmoil. The world at the moment is in economic crisis due to political instabilities in many countries.
Economic factors affecting businesses
The state of the economy is one of the key external factors affecting businesses. For instance, if an economy is growing and there is a high demand for a product or service, this will have a positive impact on businesses that produce that product or provide that service. On the other hand, if the economy is experiencing a recession and demand is low, this will have a negative impact on businesses.
Economic factors can also affect how businesses are run. For instance, if interest rates are low and businesses can borrow money at a low cost, they can expand their operations easily. On the other hand, a stock market crash or a rise in inflation can lead to a decrease in consumer demand. It is worth noting that economic factors are sometimes difficult to predict, and it is almost impossible to account for every situation; however, it is important for businesses to be aware of them and ready to act as and when necessary.
The global economy is going through a very difficult circumstance. The Bank of England warned that the UK economy would shrink by the end of 2022, and steadily continue throughout 2023 (Wearden, 2022). This is a big challenge for businesses as consumer spending is likely to decline affecting their revenues.
Social factors affecting businesses
Social factors such as public opinion, immigration, religious beliefs, and culture can affect businesses directly. For example, many people may not consume products containing alcohol because of their religious beliefs. Likewise, the selection of different types of clothes and fashion accessories is influenced by cultural factors.
There is a huge demand for vegetarian and vegan products in many countries. This shows how consumer tastes have changed over the years. Similarly, social media have affected consumer buying decisions differently. People of different generations, creeds, and walks of life now use digital technology to shop online.
Technological factors affecting businesses
Technology is one of the most important external factors affecting businesses globally now-a-days. As technology develops and changes, new products are being introduced and better and faster ways of producing products and delivering services are materialized.
A nationwide outage of the internet could have a significant impact on businesses. Similarly, if the technology is not up to date, businesses can be more vulnerable to cyber-attacks and viruses. One of the best ways to combat technological issues is to ensure that the technology is up to date, and they have a regular technology maintenance schedule in place.
Environment factors affecting businesses
The environment is also one of the important external factors affecting businesses. It can affect them in many different ways. For instance, natural disasters such as floods, hurricanes, earthquakes, wildfires, and droughts can have a significant impact on businesses. If a business is affected by a natural disaster, it may be forced to close or be short of supplies.
In 2022, the USA experienced several weather/climate disasters with losses exceeding $1 billion each (NCEI, 2022). Wildfires destroyed many businesses in Australia in the past. Many farms were destroyed across Europe due to deadly wildfires (Gillespie, 2022).
Environmental factors can also affect businesses indirectly. For instance, poor air quality can negatively affect customers and employees, which in turn can have a negative impact on businesses. Environmental factors can also have an impact on the supply chain of a business since many suppliers use natural resources, such as water and fuel.
Environmental factors are often uncontrollable. However, businesses can minimize their impact by taking precautionary actions such as creating evacuation plans for natural disasters or being equipped with the necessary technology to combat extreme weather conditions.
Legal factors affecting businesses
The discussion on legal issues is the final part of this article ‘external factors affecting businesses’. Legal factors can affect businesses in many different ways. For instance, changes in legislation can affect how businesses are run and can even result in them being forced to close. On the other hand, legal factors can also have a positive impact on businesses.
Summary of external factors affecting businesses
The success of a business is highly dependent on external factors such as the economy, competition, technology, and the environment. Business owners need to be aware of all the factors that can have an impact on their operations so they can take the necessary precautions when necessary.
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Last update: 12 August 2022
BBC (2022) External factors, available at: https://www.bbc.co.uk/bitesize/guides/zgfrpbk/revision/2# (accessed 11 August 2022)
Gillespie, T., & Albanese, C. (2022) Europe counts cost of wildfires as UK braces for record heatwave, available at: https://www.bloomberg.com/news/articles/2022-07-17/europe-counts-cost-of-wildfires-as-uk-braces-for-record-heatwave (accessed 12 August 2022)
NCEI (2022) Billion-Dollar weather and climate disasters, available at: https://www.ncei.noaa.gov/access/billions/ (accessed 10 August 2022)
Wearden, G. (2022) Bank of England hikes interest rates and warns UK to enter recession with inflation to pass 13% – as it happened, available at: https://www.theguardian.com/business/live/2022/aug/04/bank-of-england-interest-rate-decision-andrew-bailey-inflation-stock-markets-business-live (accessed 12 August 2022)
Author: M Rahman
M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.