The term ‘environmental factors‘ can have a number of meanings, depending on whether the theme is business, science, human behavior, geographical phenomena, etc. In the world of business, it refers to all the identifiable elements in the economic, political, regulatory, technological and demographic environment that affect how a company operates, grows and survives.
In the world of science, for example, when you are talking about different species, environmental factors refers to some of the elements that contribute to variations within a species. These may include lifestyle, culture, accidents, diet, terrain, and climate.
Ecologists, climatologists, geographers and environmentalists frequently talk about environmental factors when discussing the state of our planet today and how they rate our chances of survival over the next few hundred years.
The image above contains External Factors. BusinessDictionary.com defines environmental factors as follows: “An identifiable element in the physical, cultural, demographic, economic, political, regulatory, or technological environment that affects the survival, operations, and growth of an organization.”
This article focuses on environmental factors when talking about companies, organizations and other commercial enterprises.
Internal & external environmental factors
Environmental factors in business and finance consist of internal and external ones. In the internal business environment there are elements within an organization that influence the approach and success of commercial operations.
The external environment comprises a range of factors outside a commercial enterprise over which we do not have much control.
Recognizing the potential threats that exist outside and managing the strengths of your company’s internal operations are keys to commercial success.
The image above contains the Internal Factors. In marketing, they refer to the components inside the company that are unique to it. In order to develop a successful marketing strategy, an analysis of the internal environment is crucial. (Data Source: marketingstudyguide.com)
– Company Leadership: an important internal factor in our business environment. The leadership style of a firm’s management impacts its organizational culture. The effectiveness of communication, level of family-friendliness, degrees of optimism and pessimism in their nature, and the value of employees are all cultural consequences of leadership approaches.
Business entities typically provide direction or formal structure with mission and vision statements. These forward-looking statements provide the business for corporate activities and decisions.
Employee Strength: this is another important internal environmental factor. A company is more likely to thrive and succeed if its workforce is motivated, talented and hard-working than one whose employees lack those features.
How employees within a department and between departments interact also influences how effective and efficient a company is. In the world’s most successful businesses, the workforce is not only talented, but employees also work well together and collaborate on ideas and solutions to problems.
Small Business Chron makes the following comment regarding environmental factors in the world of business:
“The internal business environment includes factors within the organization that impact the approach and success of your operations. The external environment consists of a variety of factors outside your company doors that you typically don’t have much control over.”
External environmental factors
Competition: a critical external business factor. Whether a business operates in a highly-competitive industry with a large number of players, or one with a few major rivals, it is important to understand the competition well.
In most large companies, the marketing department carries out competitive analysis to compare what is offered and at what price to those of rivals. The directors then look at their internal environment and work at improving those elements that would give the company an edge over its competitors.
Businesses can react to an increase in competition by cutting prices, improving quality, spending more on promotion, cutting costs, or introducing new products.
Socio Economic Factor: this relates to the concerns, attitudes and values of target customers, especially those that are able to afford your goods or services.
People’s preferences may change for a number of reasons. For example: if parents start feeling that their children are having too much sugar in their diets, companies that do not respond will lose market share.
Another important economic factor is inflation – an outside force over which a company has virtually no control.
Legal, Ethical and Political Environments: these relate to a company’s need to comply with commercial regulations and to meet the social responsibility or ethical standards of its customers.
A country’s economy affects businesses in terms of government spending, taxation, general demand, exchange rates and interest rates.
Changes in government policy can have a major impact on the fortunes of a company. For example, new legislation forcing businesses to spend a percentage of their turnover on training employees is great news for colleges and other educational institutions.
A company may find that a large overseas market is no longer available because of its human rights record – the firm’s government makes it illegal to trade with that country.
Technological Environment: a business’ need to adapt and continually research for improvements depends on the extent of the technological evolution drives.
Companies like Apple and Samsung need to come up with new products virtually every year, while the makers of Snickers, Mars and KitKat can maintain market share for several years – even decades – without having to consider any major changes to their best-selling products.
– External costs and benefits: the building of an attractive new factory, for example, provides job opportunities to the local community – this is a social benefit; an external benefit. However, a new factory that creates a pollution problem in a nearby village is a social cost; an external cost.
Governments encourage social benefits by providing subsidies or grants, and discourage social costs with taxes, legislation and fines.
– Availability of Non-Renewable Goods: the availability of oil or natural gas, and other non-renewable goods, can vastly influence a market. Should the supply of oil and gas decline, prices may rise, greatly affecting the companies that use the fuels in any significant amounts.
– Existence of Certain Biological Species: if our physical environment changed to such an extent that the global populations of certain animals – such as goats, cows and bees – declined significantly, it would be devastating for the dairy and honey industries.
External environment always changing
Markets are always in a state of flux – things are changing all the time. Businesses must continually monitor the market and be prepared to adapt when things change. Markets may change rapidly for many reasons, including:
– Consumers develop new needs and wants.
– New competitors come onto the scene.
– New technologies mean we can make innovative products.
– The occurrence of a major event, such as a war or widespread disease. For example, foot and mouth disease saw a significant decline in demand for red meat.
– The government introduces a new law, such as increasing the minimum wage or reducing VAT (value added tax – sales tax).
Video – Environmental factors in business
This video looks at the internal and external environmental factors and which ones drive organizational change.