What Are the Internal and External Environmental Factors That Affect a Business?

If a business wants to thrive in the marketplace, it is vital for them to comprehensively understand the business factors or actors that exert an impact on the growth of the company. Once they are aware of the negative and positive effects outside and within the company, they can come up with effective strategies to solve any predicted situation. Therefore, taking a keen look at the external and internal business factors is considered the most crucial undertaking for an enterprise before launching any strategic plan. 

Every factor or actor outside or within the business has an impact on how it performs. In other words, business factors create a business environment. 

A business environment determines its success, vision, and rates. When a business is aware of its business factors, it can think of suitable strategies to deal with any predicted and unpredicted encounter. Business factors can either be internal or external. All these factors are dependent on its size, business status, and type of business. 

Internal business factors

Internal business factors are actors within the company and are under its control. These factors get grouped as either strengths and weaknesses of the company. If a single element results in positive effects on the business, it’s considered a strength. On the other hand, any business factor that hinders the company’s development is a weakness. Some examples of internal business environment factors include:

  • Value proposition
  • Plans and policies
  • Financial and marketing resources
  • Value proposition
  • Corporate image and brand equity
  • Labor management
  • Organizational structure
  • Financial forecast

External business environment

Contrary to internal business factors, the external business environment revolves around factors outside the business and have an impact on it. The company has no control over external factors. External business factors are categorized into either micro or macro factors. Some examples of micro external business factors include:

  • Customers
  • Suppliers
  • The general public
  • Talent
  • Competitors

Macro factors

  • Economic
  • Political
  • Technology
  • Natural
  • Social

Some business factors explained

External: The economy

In a declining economy, even an efficiently run business may not have the ability to survive. If your customers lose their jobs, they’ll spend less and may not purchase your products. Also, high rates on credit cards interest may discourage customers from spending on your products. You have no control over the economy, but understanding the economy works could help you spot potential threats and opportunities.

Internal:  Employees and managers

Unless you run the company by yourself, your employees are a crucial part of your business’ internal environment. Your employees have to be good at their jobs, no matter their designation. For your business, managers must be good at handling lower-level employees and overseeing essential business processes. Even if everyone is performing their level best in the company and there are internal conflicts or conflicts of interest, your business is bound to go down. 

External: Competition

Unless you have an extremely complicated or unique business, you will have to deal with competitors. When you establish a company, you fight against more experienced ones in a similar industry. After you establish yourself, you are bound to face newer firms that will try to slice away most of your customers. Competition can either make or break you, depending on how you look at it.

Internal: Financial resources

Even in the best economic situation, lack of money can be a determinant of whether a company will survive or not. When you have a limited cash flow as a business, it has a direct effect on the number of people you can hire, the amount of advertising you can do, and even the quality of equipment you can use in your business. With a large or huge cash flow, you can expand and grow your business.

External: Politics and government policy

Huge changes in government policy can affect your business. The tobacco industry is a good example. Since way back, cigarette companies have been necessitated to place warning signs on cigarette packs and lost their right to advertise on TV. As time goes, smokers are experiencing lesser and lesser areas they can smoke legally. It has led to a decrease in revenue in the cigarette industry. 

Internal: Company culture

Last but not least, another business factor that may affect how the business performs internally is the company’s culture. A healthy working culture that encourages teamwork brings about collaboration in the company and its processes. Let your company culture be clear from the get-go, and all your employees will work towards meeting the same objectives.

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