External environment of a business consists of all those external factors that are operating outside the premises of the organization. However, they impose a significant influence over the operations, survival and growth of the company. Businesses have very little or most often no control over the environment in which it is operating which arises the need to continuously conduct environmental analysis as well as adapt to external changes which serve to be a reactive or proactive response and leads towards a significantly different outcome. External environment factors can significantly affect business operations and effectiveness to a great extent.
Types of External Environment of a business
Micro environment – Environmental factors that can either be controlled or influenced by the organization are termed as micro environmental factors which include employees, customers, competitors and media.
Macro environment – There are several macro economic factors are also present that can influence businesses and their operations. These factors allow assessing the external environment along with evaluating any potential changes. These factors are usually non-controllable factors. However, they have a huge impact over organizations if not considered closely.
External Factors are integral Part of PESTLE and SWOT Analysis
Pestle analysis is an effective business analysis tool that discuss entire marketing external factors. Pestle cover six factors i.e. Political, Economic, Social, Technological, Legal and Environmental Factors.
Companies are unable to control or change national and global politics, behavior of societies and communities, world’s economy, innovation in technology and environmental and legal law.
SWOT Analysis is a strategic business tool that enables organization to identify strengths, weaknesses, opportunities and threats that may affect business operation. Unlike Pestle Analysis, SWOT Analysis consider Internal factors (Strengths and Weaknesses) and External factors (Opportunities and Threats).
Internal factors (strengths and weaknesses) are based on micro environment of a company i.e. hiring qualified and trained staff will be a strength, but irrelevant staff member will weakness. Satisfied customer is a strength, but unsatisfied customer is a weakness.
External factors (opportunities and threats) are uncontrollable and unknown. You must conduct environmental analysis to take benefits from opportunities and minimize the risk from threats.
How External Factors affect Business Environment
In order to become successful, businesses should assess the market environment that exerts an impact on the development of the organization. After evaluating the external business environment factors, companies can draft suitable strategies that will be helpful in handling a specific situation. These impacts are out of control of the company and require evaluation and timely response to the external environment of a buseinss.
Rules and regulations of a country have a very strong impact over a business. Many countries devise rules and laws that hinder the development of certain industries whereas, there are some countries where there are laws which serve to be a positive sign of the continuous support from the government. Evaluating laws, rules and regulations are important to make decisions that will be beneficial for the company.
Economy of a country is considered to be the most impacting factor for the success of an organization. Within the economy, there are several contributing factors like economic crisis, fluctuation in interest rates and other similar aspects that will have direct and strong impact over the consumption behavior of the buyers and ultimately over the profits of the business.
In order to develop exponentially, considering the infrastructure of the country is also very important. If the road to the company is not good, this will be a restriction for the company. Delivery methods will face difficulty and will pose a big challenge for the organization.
Example of Market External Factors that affect Business
Below are some examples of external factors that may affect businesses growth, profit share and even customer base if not responded.
Coca Cola and Indian political environment – Coca Cola is the most popular and the world’s largest beverage company. The company operates in different countries over the world and hence renders political aspects to be the most influencing external factor. When Coca Cola started its operations in India, it was greatly affected by the political environment of the country. Corruption and pressure from various political parties led the company to face a downward sloping profit curve. Coca Cola soon revised its operating policies and entered into the Indian market again after fulfilling all political factors.
Apple facing a Lawsuit in U.S. Courts – In December 2017, Apple facing lawsuits filed in different U.S. District Courts in New York, California and Illinois after Apple admitted that they slow down older IPhones to protect their ageing batteries performance. This situation can affect their market share and profit. It is up to Apple how they respond to external issue.
Airbnb facing Ethical and Legal Issues – Airbnb is an online short term lodging service, let people to rent out their rooms, apartments and homes to visitors. In many cities of the world it is facing lawsuits, fines, ehtical and legal issues due to not comply with local laws. Many housing activists and city authorities are saying it is disrupting neighborhood and communiteis. The company should conduct deeper analysis of their busienss model to address the legal factors affecting their business. Learn about Airbnb Pestle Analysis.