Which external environment includes regulatory parameters within which an organization must operate?

1. Career development
2. 9 External Environment Factors That Affect Business

By Indeed Editorial Team

Updated April 27, 2022 | Published July 13, 2021

Updated April 27, 2022

Published July 13, 2021

Business environments change frequently and require consideration when planning and conducting operations. Business managers and executives have a responsibility to examine internal concerns for how they may influence company decisions. It's also important to monitor any external environmental factors that can affect how the business functions as well as develop methods for overcoming these challenges. In this article, we discuss what external environment factors are, their importance and nine of these factors that affect businesses.

Related: General Environment: Six Factors That Influence Business

What are external environment factors?

External environment factors are elements that exist outside of a company's internal environment that can affect a company's operations. These outside forces can help the business or present challenges to its current processes. Managers often keep track of external environment factors so they can recognize and resolve the issues the factors cause and make appropriate changes.

Why are external environment factors important?

External environment factors are important because they can cause direct and indirect effects on business operations, personnel and revenue. The external environment of a company changes constantly in ways beyond the company's control, but executives and managers can track these changes and minimize their consequences. Choosing to monitor the dynamic nature of external environment factors allows businesses to protect themselves against predictable events and mitigate the effects of unexpected changes.

Related: What Is External Analysis? Definition and Examples

9 types of external environment factors

Here are the nine types of external environment factors that affect businesses:

1. Technological factors

As technology continues to advance, companies can benefit from these breakthroughs or face challenges in competing with them. For example, a company that manufactures GPS devices for personal cars may experience a decline in business because of the integration of GPS on mobile devices, but they can confront these challenges by developing new products. Other companies, such as health care providers, can use modernized methods to collect information from their patients, keep patient records and streamline patient care.

2. Economic factors

The state of the economy plays an important role in every aspect of daily life from the well-being of personnel to the ability of a company to thrive. When the economy trends downward and unemployment rises, businesses may have to work harder to keep their staff and change their processes to continue earning revenue. If the company produces products for retail sale, for instance, they may consider lowering the price to increase sales and positively affect their revenue.

3. Political and legal factors

As political officials leave office and new ones replace them, the policies they implement often affect businesses in relevant industries. Because of the inconsistent nature of politics, businesses monitor legislative bills closely to prepare for potential changes. Policies that can have long-term effects on companies include:

• Taxation

• Tariffs

• Employment law

• Competition regulation

• Import restrictions

• Intellectual property law

Companies affected by political decisions must modify their processes to comply with new legislation and regulations but doing so can keep them in business.

Related: How To Navigate Workplace Politics

4. Demographic factors

Companies with successful products and services evaluate the demographics of their target market to ensure they meet the needs of those who benefit from their offerings. They also perform tests to measure how well they serve their customers. This helps them understand if their target market has changed and how they can develop better ways to serve their loyal customers and earn new ones. Demographics that affect business decisions and processes include:

• Age

• Gender

• Race

• Nationality

• Belief system

• Marital status

• Occupation

• Income

• Level of education

For example, when mobile phone companies emerged in the 1990s, their marketing efforts focused on young, successful professionals. Now, people of all ages use mobile devices daily. Telecommunications companies have adapted to this change by modifying the features of their products and taking different approaches to advertising methods.

Related: What Are Demographics? (Definition, Examples and Uses)

5. Social factors

Where people live, their personal values and their socioeconomic status affect what, where and why people make purchases. Businesses take social factors into consideration when developing and marketing products, and many use current events, movements and social issues to appeal to their customers. For example, a company that supports a women's organization may earn the trust and loyalty of customers who identify as female. Catering to the specific preferences and expectations of underrepresented groups, who have more influence on the market today than in past years, can also contribute to customer satisfaction and business growth.

6. Competitive factors

Businesses can increase their market share and stay relevant to their customers by keeping track of their competitors. They can identify and evaluate successes and challenges, thus learning what to incorporate into their own processes and how to prevent revenue loss. They can also use the information they gather to develop ideas for product changes, product relaunches and new product development.

Related: What Is Competition Mapping? (With Examples)

7. Global factors

Executives have a duty to keep track of both domestic and global issues, especially if they conduct business internationally. By learning about social issues that affect those in other countries and their cultural norms, consumer trends and economic status, company leaders can provide their teams with relevant training. This enables them to develop products or offer services that meet the needs of international customers by providing solutions to challenges they face as consumers.

8. Ethical factors

Because each individual has a distinct concept of ethics and morality, some companies may find it challenging to balance the personal lives of staff members with their expectations in the workplace. Employees' leisure activities, such as social media accounts, can reflect on their employer. As representatives of the company, they have a responsibility to avoid behavior that could negatively affect the business. Managers can address issues such as sharing classified information or the harassment of a colleague outside of work by establishing guidelines and taking disciplinary action when necessary.

Related: 15 Ethical Principles in Business

9. Natural factors

As environmental awareness continues to grow, more consumers have realized the effects of business processes on the planet. Some consumers have used their purchases to support companies that develop ecologically friendly practices, such as using compostable packaging and solar energy. By paying attention to these external concerns and changing their operations, businesses can make changes that help them protect the environment, retain customers and increase revenue.

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