A business does not function in a vacuum. It has to act and react to
what happens outside the business.
These factors that happen outside the business are known as external
factors or influences.
It is also important to consider the effects a business can have on the
local community. These are known as the social benefits and social
A social benefit - is where a business action leads to benefits to the
community e.g. jobs
A social cost - is where a business action leads to costs e.g. pollution
Governments encourage social benefits through the use of subsidies and
grants (e.g. regional assistance for undeveloped areas).
They discourage social costs with fines, taxes and legislation.
These will affect the main internal functions of the business and possibly
the objectives of the business and its strategies.
Main external factors affecting businesses
The main factor that affects most business is the degree of competition
– how fiercely other businesses compete with the products that another
The other factors that can affect the business are:
Social – changes to the structure of society e.g. working women, single
how consumers, households and communities behave and their beliefs.
For instance, changes in attitude towards health, or a greater number of
pensioners in a population.
Legal – the way in which legislation in society affects the business. e.g.
changes in employment laws on working hours.
Economic – how the economy affects a business in terms of taxation,
government spending, general demand, interest rates, exchange rates
and European and global economic factors.
Political – how changes in government policy might affect the business
e.g. a decision to subsidise building new houses in an area
could be good for a local brick works.
Technological – how the rapid pace of change in production processes
product innovation affect a business.
Business and Competition
Businesses face competition
The amount and type of competition depends on the market the
business operates in:
A business could react to an increase in competition (e.g. a launch of
rival product) in the following ways:
Cut prices (but can reduce profits)
Improve quality (but increases costs)
Spend more on promotion (e.g. do more advertising, increase brand
loyalty; but costs money)
Cut costs, e.g. use cheaper materials, make some workers redundant
Changing External Environment
Markets are changing all the time therefore organisations need to react
or lose customers.
Why do markets change rapidly:
Customers develop new needs and wants.
New competitors enter a market.
New technologies mean that new products can be made.
A world or countrywide event happens e.g. Gulf War or foot and mouth
Government introduces new legislation e.g. increases minimum wage.