Factors Affecting Business Environment And Their Impact On Business Pdf

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Marketing strategy is a very important aspect of making a business successful. The absence of a clear strategy, setting up meaningful objectives and goals can be very difficult.

What Are Internal & External Environmental Factors That Affect Business?

Marketers must be aware of the business cycle, and react appropriately according to which stage of the cycle the economy is in. The state of the economy is always changing—interest rates rise and fall, inflation increases and decreases.

Economic changes will affect the demand and supply sides of the market, meaning that the marketer must always be aware of the general economic environment. Fluctuations in our economy follow a general pattern known as the business cycle.

These fluctuations in economic conditions affect supply and demand, consumer buying power, consumer willingness to spend, and the intensity of competitive behavior. The four stages in the business cycle are: prosperity, recession, depression, and recovery see and try to identify the different stages. Real Median Household Income, : The chart shows the change in household income over the last three decades.

Shaded areas denote times of recession. Prosperity represents a period of time during which the economy is growing. During prosperity, consumer disposable incomes are high, and they try to improve their quality of life by purchasing products and services that are high in quality and price. The U. Recession is characterized by a decrease in the rate of growth of the economy. Unemployment rises and consumer buying power declines. Recession tends to occur after periods of prosperity and inflation.

During recessions, marketing opportunities are reduced. Because of reduced buying power, consumers become more cautious, seeking products that are more basic and functional. Depression represents the most serious economic downturn. Unemployment increases, buying power decreases, and all other economic indicators move downward. Consequently, consumers are unable or reluctant to purchase products, particularly big-ticket items. Also, consumers tend to delay replacement purchases. Although many marketers fail during this period, insightful marketers can gain market share.

Recovery is a complicated economic pattern, in that some economic indicators increase while others may stay low or even decrease. Much of what happens during a recovery may be a result of intangibles, such as consumer confidence or the perception of businesses that things will get better. Tentative marketers take serious risks. Premature marketers may face dire consequences. For marketers, an important task is to attempt to determine how quickly the economy will move into a situation of prosperity.

Improper forecasting can lead some firms to overextend themselves, as consumers may be slow to change purchase habits they have been accustomed to in the more difficult economic times. The economy is cyclical in nature. We know that the cycles will occur. We just cannot predict exactly when or how severe the cycles will be. Assumptions must be made about money, people, and resources. For example, many organizations become less aggressive when they believe the economy is not going to grow.

If they are right, they may do well. If they are wrong, those organizations that are more aggressive can perform very well often at the expense of the conservative organizations. Assumptions must also be made about such economic factors as interest rates, inflation, the nature and size of the workforce, and the availability of resources, such as energy and raw materials.

For marketers, the job is to use the information available to make educated predictions about what part of the cycle the economy is in, and best to react to that.

In a sense, such data collection scanning acts as an early warning system for the organization. It allows marketers to understand the current state of the environment and to predict trends. One element of environmental scanning is the general economic environment. Internal and External Factors : It is important to know the internal and external factors that impact an organization.

The CPI and CCI are measures of the strength of the economy, and perceptions of businesses and individuals towards the economic future. The economy affects buying power. For example, if prices decline, consumers have greater buying power. If the value of the dollar increases relative to foreign currency, consumers have greater buying power. When inflation occurs, consumers have less buying power. Purchasing power is the amount of goods or services that can be purchased with a unit of currency.

For example, if you had taken one dollar to a store in the s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the s. Currency can be either a commodity money, like gold or silver, or fiat currency, or free-floating market -valued currency like US dollars. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.

A consumer price index CPI measures changes in the price level of consumer goods and services purchased by households. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation.

A CPI can be used to index i. In most countries, the CPI is one of the most closely watched national economic statistics. Consumer confidence is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy.

In essence, if the economy expands, causing consumer confidence to be higher, consumers will be making more purchases. On the other hand, if the economy contracts or is in bad shape, confidence is lower, and consumers tend to save more and spend less.

A month-to-month diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to find and retain good jobs. The ability to predict major changes in consumer confidence allows businesses to gauge the willingness of consumers to make new purchases. As a result, businesses can adjust their operations and the government can prepare for changing tax revenue.

If confidence is dropping and consumers are expected to reduce their spending, most producers will tend to reduce their production volumes accordingly. For example, if manufacturers anticipate that consumers will reduce retail purchases, especially for expensive and durable goods, they will cut down their inventories in advance and may delay investing in new projects and facilities.

The government will get ready for the reduction in future tax revenues. On the other hand, if consumer confidence is improving, people are expected to increase their purchases of goods and services.

In anticipation of that change, manufacturers can boost production and inventories. Large employers can increase hiring rates. Government can expect improved tax revenues based on the increase in consumer spending. Consumer confidence is formally measured by the Consumer Confidence Index CCI , a monthly release designed to assess the overall confidence, relative financial health and spending power of the US average consumer. The CCI is an important measure used by businesses, economic analysts, and the government in order to determine the overall health of the economy see.

Companies doing business outside of the US should be aware that the political environment can differ greatly. The political environment in countries throughout Europe and Asia is quite different from that of the United States. In the U. In other words, the U. Nevertheless, governments outside the U. Business activity tends to grow and thrive when a nation is politically stable. Although multinational firms can still conduct business profitably, political instability within countries negatively affects marketing strategies.

Governments set some exchange rates independently of the forces of supply and demand. Exchange rates fluctuate widely and often create high risks for exporters and importers. US companies make one-third of their revenues from products marketed to countries in Asia and Latin America. Regional trading blocs represent groups of nations that join together and formally agree to reduce trade barriers among themselves. NAFTA is such a bloc. Its members include the US, Canada, and Mexico. However, a uniform tariff is assessed on products from unaffiliated countries.

In addition, NAFTA seeks common standards for labeling requirements, food additives, and package sizes. One of the results of trade agreements like NAFTA is that many products previously restricted by dumping laws — laws designed to keep out foreign products — can be marketed. Dumping involves a company selling products in overseas markets at very low prices, with the intention to steal business from local competitors.

These laws were designed to prevent pricing practices that could seriously harm local competition, as well as block large producers from gaining a monopoly by flooding markets with very low-priced products and raising those prices to very high levels. Almost all the countries in the Western hemisphere have entered into one or more regional trade agreements. Such agreements are designed to facilitate trade through the establishment of a free trade area customs union or customs market.

This eliminates trade barriers between member countries while maintaining trade barriers with non-member countries. The most common form of restriction of trade is the tariff, a tax placed on imported goods. Customs unions maintain common tariffs and rates for non-member countries.

A common market provides for harmonious fiscal and monetary policies while free trade areas and customs unions do not.

Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. Not surprisingly, US companies with a strong business ties in a foreign country may support tariffs to discourage entry by other US competitors.

Expropriation occurs when a foreign government takes ownership of plants and assets. Many of these facilities end up as private rather than government organizations. Because of the risk of expropriation, multinational firms are at the mercy of foreign governments, which are sometimes unstable and can change the laws they enforce at any point to meet their needs.

External Factors Affecting Business Environment

Business Environment is not concerned with a single factor. It comprises of several factors and each factor influences the business firm in its own way. Some factors influence the performance of the firm directly while the influence of some other factors is only indirect. These factors provide opportunities, threats and challenges to the firm. Thus, environment is multi-dimensional and very complex in nature.


Three mains categories of the business environment are suggested: that the institutional and the technological factors are the most positively and significantly their impact on companies' performance in order to identify the.


PESTLE Analysis: Environmental Factors Affecting Business

A business concept that looks perfect on paper may prove imperfect in the real world. Sometimes failure is due to the internal environment — the company's finances, personnel or equipment. Sometimes it's the environment surrounding the company.

Our website is made possible by displaying online advertisements to our visitors. Please consider supporting us by disabling your ad blocker. This simple analysis, which revolves around the Political, Economic, Social, Technological, Legal, and Environmental factors that affect a business, is an extension to PEST analysis which only looks at the first four of the aforementioned factors. However, plenty of individuals run into confusion when trying to decide what falls into which category, and why.

The economic environment can have a major impact on businesses by affecting patterns of demand and supply. Companies need to keep a track of relevant economic indicators and monitor them over time. The rise in the number of dual income families in several parts of the world, including urban world, has led to the rise in the incomes for such families. This has resulted in higher demand for lifestyle and luxury products.

Environmental Factors Affect Business

What Are Internal & External Environmental Factors That Affect Business

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Environmental Factors Affecting Business.

Marketers must be aware of the business cycle, and react appropriately according to which stage of the cycle the economy is in. The state of the economy is always changing—interest rates rise and fall, inflation increases and decreases. Economic changes will affect the demand and supply sides of the market, meaning that the marketer must always be aware of the general economic environment. Fluctuations in our economy follow a general pattern known as the business cycle. These fluctuations in economic conditions affect supply and demand, consumer buying power, consumer willingness to spend, and the intensity of competitive behavior.


External environmental factors, internal environmental factors, business, performance. Micro Small and Medium Enterprises (MSMEs) have an.


If a business wants to be successful in the marketplace , it is necessary for them to fully understand what factors exert impact on the development of their company. Once they know about both positive and negative effects within and outside the company, they can produce suitable strategies to handle any predicted situation. Therefore, examining internal and external factors is considered the most important task for an enterprise before launch any strategic marketing plan. To get a proper understanding of the business environment, we should step by step analyze individual elements of this term. Secondly, because we know that a business firm is a social entity which is formed by a hierarchical structure where all necessary items of its own are activated together to reach the collective goal.

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5 Comments

  1. Cesaria P. 10.04.2021 at 18:50

    It affects the decisions, strategies, process and performance of the business. The environment is consisting of factors which are beyond the control of the business (STEP) social, technological, economical, legal and political. It provides opportunities or poses threats to the organization.

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  5. Gedlepsnaba1991 17.04.2021 at 04:26

    It is important for every business organization to interact and transact with its environment because the business environment has direct relationship with the organization.