What are environmental factors? Definition and meaning

The term ‘Environmental Factors’ can have various 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.

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.

Internal environmental factors
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

This is 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 factor 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. Integrating applied economics with big data analytics, companies are now better equipped to identify and respond to environmental factors that could impact their market position and profitability.

Businesses must continually monitor the market and be prepared to adapt when things change.

Emerging trends in applied economics are shaping how businesses forecast and adapt to environmental factors, emphasizing sustainable practices and long-term strategic planning.

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).

Example sentences

Below are some example sentences containing the words “environmental factors” to help you see how we can use the term in various contexts.

  1. “When planning the new urban development, the architects had to consider environmental factors such as local climate patterns and the area’s biodiversity.”
  2. “The rise in consumer eco-awareness has pushed companies to re-evaluate their supply chains, taking into account the environmental factors that contribute to their carbon footprint.”
  3. “In agricultural research, scientists study environmental factors like soil quality and water availability to develop more sustainable farming practices.”
  4. “The patient’s recovery process was not only influenced by medication and therapy but also by environmental factors within the hospital, such as air quality and noise levels.”
  5. “Investors are increasingly assessing the environmental factors that could affect the long-term value of their portfolios, including climate change risks and resource scarcity.”
  6. Environmental factors played a crucial role in the migration patterns of ancient civilizations, often dictating the routes and timing of their movements.”
  7. “Marketing teams must analyze environmental factors such as cultural trends and social attitudes to successfully launch a new product in a global market.”

Video – What are Environmental Factors?

In this visual guide presented by our affiliate channel, Marketing Business Network on YouTube, we explain what “Environmental Factors” are using straightforward language and easy-to-understand examples.