Commerce: The External Business Environment

• In addition to internal factors that affect the operations of a business
• There are external factors which also exert their influence
• These external factors together constitute the external business environment
• The external environment is sometimes known as PESTEL
• This stands for the various components that make up a business’s external environment
• Namely the following aspects of the external environment:
  • Political factors
  • Economic factors
  • Social factors
  • Technological factors
  • Environmental factors
  • Legal factors

Political factors

• Refers to governmental activities and political conditions that may affect your business
• These factors are mainly determined by the ideology/philosophy of the government in charge
• This determines things like:
  • tax policy,
  • labour law,
  • environmental law,
  • trade restrictions,
  • tariffs,
  • licence fees etc
• All these things will have a profound effect on the way businesses operate or if they operate at all
• Political stability is also important as it determines the economic health of a country and makes sure that businesses do not suffer from disruptions
• It is important to note that there are many types of governments including the local and national government
• All these impact on the operations of a business

Economic factors

• These factors can be:
• Macroeconomic factors that affect the economy as a whole for example interest rates, inflation, employment rates, taxes etc
• Microeconomic factors that affect the business specifically for example market size, demand for the specific product the business is selling etc

Social factors

• Refers to sociological factors that can impact on the business
• include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety
• For example, gay relationships are accepted in other societies such as in western countries while they are banned in other countries such as in African countries
• Anti-gay business practices would attract a backlash in these western countries
• Conversely, business activities promoting gay relationships in Muslim and African countries would attract a backlash
• It is important that a business be sensitive to these attitudes and societal norms

Technological factors

• These are innovations that can either enhance your business or harm it as a whole
• Technological changes can create barriers to entry, for example, it would not be easy to form a plane making business right now because the current major players Boeing and Airbus have accumulated so much knowledge and technology it would require lots of capital in research and development just to catch up with them
• technological shifts can affect costs, quality, and lead to innovation
• A business needs to keep abreast with technological changes that might affect otherwise it might go under

Environmental factors

• These refer to the actual physical environment
• This is taken to include weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance
• Global warming is now accepted as a fact
• It has a complex impact on various businesses
• It is important that a business be mindful of these factors and how they are constantly changing

Legal factors

• A business should make sure that it is operating on the right side of the law
• The legal environment refers to the applicable laws, by-laws and regulations
• Laws include discrimination law, consumer law, antitrust law, employment law, and health and safety law
• These factors can affect how a company operates, its costs, and the demand for its products
• Regulations include things like the accounting framework under which a business operates

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