All businesses have to contend with and cater for environmental factors that influence the way they operate and evolve. The business landscape changes constantly, and to succeed, companies must be aware of both internal and external environmental factors and understand how these factors impact business development. This guide will outline the most significant environmental elements.
External environmental factors
External environmental factors are often difficult to control because they constitute outside forces, which influence businesses across an industry or even right across the board. Although companies are powerless to impact external factors, it is incredibly beneficial to be aware of the outside environment in order to be able to adjust, to cater for emerging trends and to overcome new challenges. Within the bracket of external factors, there are both micro and macro elements.
Micro factors
Examples of micro factors include:
- Customer preferences and buying trends
- Marketing and media
- Talent pools and recruitment trends
- Competition
- Suppliers
Macro factors
Macro factors include:
- Economic situation
- Politics
- Legislation
- Technology
- The natural environment and geography
- Societal influences
Some environmental factors are more influential than others. If the economy is struggling, for example, or there is political unrest, it will be very tough for any business to succeed, regardless of how brilliant their marketing and branding strategies are or how many 5-star reviews customers leave. Local, national or international laws can also limit growth or restrict operations, especially during times of economic or political uncertainty.
Internal environmental factors
Internal environmental factors are controlled by the company and they relate to decisions that are taken in-house. An internal environment can be healthy or unhealthy, and often, businesses can improve performance by identifying and addressing internal weaknesses.
Examples of internal factors include:
- Policies and procedures
- Human resources and recruitment
- Finances and accounting
- Marketing
- Branding and corporate image
- Access to physical assets, for example, machinery, equipment and technology
- Employee management
- Morale and employer-employee relationships
- Organisational structure and management
- Infrastructure and logistics
- Decision-making (on the part of the company owner or shareholders)
A closer look at the most important environmental factors
Now that we have established the most influential environmental factors that affect companies, it’s beneficial to explore them in more detail to gain an understanding of how they impact the business and how firms can respond and adapt.
Internal factors
Human resources, recruitment and employee management
Human resources departments play a crucial role in the day to day running of modern businesses. Driven, motivated, enthusiastic, skilled employees can be the jewel in the crown, while poor recruitment strategies and low morale can hold a business back and ruin its reputation. To maximise the chances of success, every company should have a solid strategy in place to hire the best talent and keep hold of its best employees.
Financial capital
Every business needs to make money to survive and grow. Company owners should have a firm grasp on the finances and the ability to budget and forecast to prevent cash flow problems and to improve efficiency without sacrificing quality. Capital needs to be invested in tangible products, for example, materials, stock and machinery, and intangible expenses, such as marketing and staff training. The key to growth often lies in identifying the best areas in which to spend and getting the timing just right. In 2010, for example, Coca Cola spent almost $3 million on marketing alone.
Improving efficiency
Increasing efficiency is a means of saving time, effort and money. Business owners can boost efficiency by streamlining process, identifying areas of weakness and investing in measures that speed up operations, for example, training and technology. As every business is unique, it’s critical for owners to be aware of how their company functions to understand how improvements can be made.
Company structure
All companies should have a clear structure, regardless of whether they utilise a centralised or a decentralised system. Company bosses, senior members of staff, employees and customers should all be aware of how the firm operates, and communication should be a priority at every level.
Infrastructure and innovation
Technology is advancing all the time, and new trends emerge continually. To compete, to satisfy customer demands and to maintain high levels of performance and efficiency, it pays to invest in infrastructure and to strive to be an innovator in the field. It’s better to capitalise on new trends and technology and blaze a trail, rather than to respond to a competitor’s success.
External factors
The economy
Every company in the world is influenced by economic circumstances. Positive moves can benefit businesses, while shrinkage or even recession can deal a bitter blow. The economy impacts companies due to taxes, inflation, wages, demand and supply and the exchange rate.
Legislation
Laws can help or hinder businesses, and they vary from one country to the next. Business owners should always be aware of the regulations in place to ensure compliance and to benefit from legislation that promotes growth.
Technology
Technology has an increasingly integral role to play in business, and it can benefit small, medium-sized and large businesses. Innovations like AI and chatbots can improve efficiency and customer service at the same time as cutting labour costs. Company owners should use market research and data analysis to determine which kinds of technological developments and systems would be most beneficial for them based on customer demands and preferences and individual business objectives.
Customer demand
Everyone knows that to make it in business, you have to give the customer what they want. Consumer trends change, and businesses have to adapt and make sure they continue to provide services and products that customers want. Marketing strategies should always cater for the ideal buyer. Research is vital to connect with clients and really get to know customers.
Competition
Every company will have to take on and beat rivals to survive in a competitive marketplace. Competition is a double-edged sword, but it can play to your strengths if you’re prepared to conduct research, analyse your performance and listen to customer feedback.
In Conclusion
Businesses cannot operate as isolated entities, and every company owner has to be aware of environmental factors that impact the way they operate and serve customers. There are several internal and external factors that affect businesses, and having an understanding of how these elements influence companies can help to maximise the chances of successful business growth and development.
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