Operating a successful business isn’t just about working hard, but rather about working smart. This can mean improving on planning, management, and targeting, along with many other things. The first step in actually doing so, though, is periodically reviewing and analyzing where you are in the market, and what you are doing.
Looking at the factors that affect the performance and operation of your business can provide this information, which will tell you what exactly might need improving. These factors can be positive or negative, and either internal or external. What we mean by this is that these factors can either be as a direct consequence of the actions of the company (internal), or completely unrelated and avoidable (external).
Relevant Article: Internal Factors that May Affect the Business Organization
There are a number of different external variables which can affect a business. To give a few examples, 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.
If your business was the only thing in existence, then external factors wouldn’t matter. However, this is never the case. There will always be variables out of your control that directly affect how your business functions and performs, and as such there is no excuse to ignore them!
External Factors in PESTLE Analysis
PESTLE analysis, a more developed form of ‘PEST’ analysis, is one of the most important tools in business analysis (hence the name of this website!), and relies almost entirely on external factors.
PESTLE analysis focuses on six important factors which can influence business — political ones, economic ones, sociocultural ones, technological ones, legal ones, and environmental ones. In case it hasn’t just yet clicked, all of these six factors are external. Companies generally can’t change local and global politics, the world’s economy, society’s behaviour, the development of technology, local law, or the environment — but yet, all of these factors directly affect how companies operate and whether or not they succeed.
External Factors in SWOT Analysis
SWOT analysis is another popular business analysis technique. Unlike with 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 (or facing) a given company, so in fact, it looks at two internal factors and two external factors.
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 taken into consideration in SWOT analysis. Opportunities come and go randomly, without you being able to change their timing or frequency (but only how you approach them). The same goes for Threats.
Specific Examples of External Factors that Affect Businesses
Let’s look at some examples of external factors that influence businesses to further understand their nature and importance.
- Nestle — Retailers introducing own brand-products: supermarket chains (e.g. Walmart, Kroger, Aldi) which provide Nestle with many of their sales are slowly beginning to create their own brands and promote them in increasing amounts. Nestle cannot prevent these companies from doing so (which is what makes this an external factor).
From “SWOT Analysis of Nestle, the popular food brand”
- Apple — Increasing labor costs in China: recently increasing labor costs in China, where Apple has many of its products manufactured, means that there is less profit to be had for Apple. Again, Apple cannot stop this from happening, making it external, but they can still choose how to approach the challenge.
From “Apple Inc. PESTLE Analysis”
- Pepsico — Social media growth: the development of social media platforms is a positive, external factor for Pepsico. This provides them with a new way to market their product and raise public awareness for it. To clarify once again: this is an external factor because, even if Pepsico wanted to, it wouldn’t be able to prevent the growth of social media.
From “STEEP Analysis Example of Pepsico”
In summary, the external factors that affect a business are the variables which influence the operation and performance of a company despite their innate inability to be changed. They play a huge part in both the SWOT analysis, and the PESTLE analysis. There are many general examples of how external factors can affect businesses, as well as specific ones which can be seen in massive transnational corporations like Nestle, Apple, and Pepsico.