Explore 8 types of external factors affecting a business, how to use them in different types of analysis and real-life examples of companies affected.
A business doesn't operate in a vacuum. The external environment can significantly affect its operation. The way the environment influences a business depends on several internal and external factors. In the next 8 minutes, I'm going to:
- List all the external factors that affect a business
- Give real-life examples of how each type of external factor has affected businesses
- Include all the types of analysis that take specific external factors into account
What are external factors?
External factors are events that a business cannot control but affect its operations and success. These outside forces can have a positive or a negative impact on the business. They are the exact opposite of internal factors.
To give a few examples of external factors right from the start to better understand the definition, think of:
- How the weather might affect a food production company,
- how the development of technology might affect a traditional publishing company,
- or how the actions and success of competitors might affect any company.
Why are external factors important?
Based on external factors, business managers and strategic planners can make better business decisions. For that reason, they conduct several types of analysis that include some or all of these external factors. Those analyses include:
- PEST Analysis
- PESTLE Analysis
- STEEP Analysis
- STEEPLE Analysis
- STEEPLED Analysis
If a business were the only thing in existence, then external factors wouldn’t matter. However, this is never the case for any business. External factors out of their control will always directly affect how their business functions and performs, and as such, there is no excuse to ignore them!
8 types of major external environmental factors affecting the business world
Political factors affecting business
Political factors are external factors such as government, trade and tax policies, general political issues, changes in leadership, regulation, and political trends. They are very important as they influence crucially the business’ operations. But political factors have a unique characteristic: they can actually influence the rest of the factors!
Governments and international bodies set laws and regulations. These can significantly impact the world’s economy, society, technological advancements, environmental regulations, and legal systems. I explain this better here where you'll find everything related about this type of external factors.
Political factors can be:
- Trade policies
- Political trends
- Taxation policies
- Regulation trends
- Government policies
- Changes in leadership
- General political issues
- General political issues
The following types of analysis include political factors:
- PEST Analysis
- PESTLE Analysis
- STEEP Analysis
- STEEPLE Analysis
- STEEPLED Analysis
Political external factors example
- Brexit is a political external factor that has had a significant impact on every company dealing with the market in the UK. Specifically, Tesco had to adapt to new trade barriers and changes in tariffs as we found out in our PESTLE analysis of the groceries company.
Economic factors affecting business
Economic factors are external factors that influence the economy’s performance, which in turn can affect businesses and individuals. These factors include:
- Inflation
- Interest rates
- Exchange rates
- Economic growth
- Unemployment levels
The following types of analysis include economic factors:
- PEST Analysis
- PESTLE Analysis
- STEEP Analysis
- STEEPLE Analysis
- STEEPLED Analysis
Economic external factor example
- Energy prices are economic external factors that have direct impact on companies operating in energy industry. Tesla, for example, will keep track of energy prices to find out how competitive its electric vehicles can become compared to traditional vehicles, as we examined in its PESTLE analysis recently.
Social factors affecting business
Here, I have to look carefully at the social and cultural changes as external factors that affect the business environment. It is vital to point out the trends and patterns of society. Social factors usually include:
- Lifestyle trends
- Education level
- Age distribution
- General attitudes
- Consumer behavior
- Health consciousness
- Family and population size
The following types of analysis include social factors:
- PEST Analysis
- PESTLE Analysis
- STEEP Analysis
- STEEPLE Analysis
- STEEPLED Analysis
Social external factor example
- People can be very picky when it comes to their smartphones' electromagnetic radiation. This is a social external factor that will affect Apple, for example, when it comes to iPhone sales as we discovered in Apple's PESTLE analysis. Should Apple come up with a strategy to reduce their phones' radiation levels, will make the iPhone even more popular and drive up sales.
Technological factors affecting business
Technological factors are external factors related to the existence, availability, and development of technology. These could include everything related to technology. Notable technological factors I come across during my analyses are:
- E-commerce
- Cybersecurity Threats
- Emerging Technologies
- Big data and computing
- AI and Machine Learning
- Supply Chain Automation
The following types of analysis include technological factors:
- PEST Analysis
- PESTLE Analysis
- STEEP Analysis
- STEEPLE Analysis
- STEEPLED Analysis
Technological external factor example
- New technologies and innovation, as external factors, can help businesses in product design and improvements. Nike, for example, capitalized on shoe technology recently and launched the Air Max Dn, as we saw in Nike's PESTLE analysis.
Legal factors affecting business
Legal factors are external factors that refer to how the law and regulations affect the way businesses operate. These may include:
- Labor laws
- Consumer laws
- Market regulation
- Health and safety laws
- Import/Export regulations
- Anti-competitive practices
The following types of analysis include legal factors:
- PESTLE Analysis
- STEEPLE Analysis
- STEEPLED Analysis
Legal external factor example
- Copyright laws are usually legal external factors that affect the media industry. Netflix, for example, needs to make sure they have the rights to serve up their shows on different countries worldwide. Every country is expected to have somewhat modified copyright laws, which will force Netflix to come up with a distribution plan, as our Netflix PESTLE analysis discussed.
Environmental factors affecting business
Environmental factors are external factors that describe how our planet and ecosystem can impact the organization. Since we cannot control the weather, organizations need to adapt their strategies accordingly.
Whenever an analysis requires me to explore environmental factors and how they affect a business or project, these come first to mind:
- Climate change
- Sustainability
- Environmental regulations
- Waste Management
- Consumer Environmental Awareness
The following types of analysis include environmental factors:
- PEST Analysis
- PESTLE Analysis
- STEEP Analysis
- STEEPLE Analysis
- STEEPLED Analysis
Environmental external factor example
- Increasing concern over carbon emissions and climate change have worked in Tesla's favor, as we saw in its PESTLE analysis. Tesla positioned itself as a pioneer in electric vehicles (EVs) and sustainable energy solutions. This led to benefits from various government incentives for clean energy.
- Environmental risks associated with oil and gas extraction became a reality for BP following the Deepwater Horizon oil spill in 2010. As a response, BP has committed to becoming a net-zero company by 2050.
Ethical factors affecting business
Ethical factors cover the range of social values that shape business behavior. Ethics comes from the Greek word “ethos,” meaning character. The values provide a basis for what is right and what is not. The ethical ideas of a country will not change overnight. But, small changes in morality take place over time.
Ethical factors are often the following:
- Bribery
- Violence
- Reputation
- Anonymity
- Volunteering
- Confidentiality
- Informed consent
Ethical factors are present in the following types of analysis:
- STEEPLE Analysis
- STEEPLED Analysis
Ethical external factor examples
- A business is partnering with a third party to conduct an online survey. The business communicates with their customers for their honest intentions and promises anonymity. Unfortunately, the survey company collects personal data and other identifying information with people's consent. The business will be negatively affected by losing the responders' trust.
- In our STEEPLE analysis of Samsung we examined how ethical factors affect Samsung's operations. For example, we saw that reputation will affect Samsung. The electronics company must build on its reputation by either offering reliable products, responding promptly to customers with impeccable customer service, or volunteering for high-profile causes.
Demographic factors affecting business
Demographic factors are specific data about the population's characteristics. Such factors include:
- Gender
- Income
- Religion
- Age range
- Education level
- Homeownership
- Race and ethnicity
- Employment status
Demographic factors are only present in STEEPLED Analysis.
Demographic external factor examples
- Demographic: falling birth rate. This leads to reduced demand for toys and kids' products. A toy company, like LEGO or Mattel, is going to be affected negatively, most probably with sales expected to drop.
- Demographic: higher education level. This leads to a more skilled workforce available for hiring. This will certainly be a positive external factor for a tech company such as Intel.
External factors in SWOT Analysis
SWOT analysis is another popular business analysis framework. Unlike PESTLE analysis, not all of the factors taken into account in SWOT analysis are external. SWOT analysis looks at the Strengths, Weaknesses, Opportunities, and Threats of a given company.
Strengths and Weaknesses are the two internal variables. A company can directly influence what it works on (and hence what it turns into strengths), and what it neglects or forgets about (which become weaknesses).
Opportunities and Threats, on the other hand, are the external factors considered in SWOT analysis. Opportunities come and go randomly, and you cannot change their timing or frequency (but only how you approach them). The same goes for Threats.
External factor example: Opportunities
- As people keep turning to celebrities and athletes for buying recommendations, fashion and sportswear companies can turn that trend into an opportunity. Nike, for example, has already built strategic partnerships and collaborations with fashion designers and athletes, to promote its shoes. We talked about that in our SWOT analysis of Nike.
External factor example: Threats
- Retailers introducing own brand-products: supermarket chains (e.g. Walmart, Kroger, Aldi) are creating their own brands and promote them in increasing amounts. Nestle, a retail company offering its products in supermarkets, cannot prevent these companies from doing so and will have to compete against them. We ran across this threat in Nestle's SWOT analysis.
