1.4 Explain the external factors that affect organisations and their impact

External factors which may affect are business include

  • Economic
  • Political
  • Social
  • Environment
  • Technological
  • Competition

It is impossible for a business to control external factors so they have to be able to respond to them.  Some external factors will have a positive impact on a business, others could be negative.

Economic

Economic factors are covered in section 1.3 Explain the effect of the wider economy on organisations

Political

Political factors are covered in section 1.5 Explain the effect of the political environment on organisations

Social

Social factors are things that affect the habits and spending of customers, and include:

  • demographics
  • lifestyle
  • tastes and trends

Demographics are the statistical characteristics of human populations and include age, education, religion, nationality, immigration, income and ethnicity.  This information is used by firms who provide goods and services to enable them to reach their target audience

Lifestyle shows an individuals attitudes, way of life, interests, values and world views.  This will reflect on how they spend their disposable cash and in turn affect businesses.

Tastes and trends are the goods or services that are currently fashionable or required.  For example, during the Covid pandemic items such as hand gel and masks were initially in short supply.  Some companies adapted their businesses to provide these goods as their usual products were not selling.

Environmental

Environmental factors include physical conditions such as the weather and the green credentials of the company, including pollution and recycling.

The weather can affect a company’s sales.  In winter, fashion store customers will require warm and weatherproof clothes.  Heavy snow can create demand for salt, grit, shovels and sledges.  During a heatwave customers will buy ice creams, cold drinks and sun cream.

Many customers are aware of environmental damage and seek goods from companies who minimise their carbon footprint by recycling or reducing pollution.  Companies who are perceived to cause a negative environmental impact may incur reputational damage, thus reducing their customer base.

Technological

Technological factors refer to how new equipment and practices affect businesses, and include:

  • ICT
  • Research and development
  • automation
  • e-commerce

ICT can make communication and processes easier and quicker within an organisation.  Companies need to ensure their software is safe and up to date.  If not they may not keep up with the competition.

Research and Development is the process organisations take in order to provide new products, services or systems.

Automation is a way of making machines do the work previously done by people.  This can reduce a companies costs as they have less salaries to pay.  The employees can be redeployed to other roles although some may no longer be required.

E-commerce is a system which allows buying and selling on line.  This can enable companies to reach a wider customer base, although it is very competitive.

Competition

Competition is how similar businesses can affect each other, including

  • imitators
  • price wars
  • product differentiation

Imitators produce cheaper versions of new successful products.

Price wars happen when companies complete for the same customers by reducing prices.  Some large companies use loss leaders to attract customers into their store with the view they will buy other products at the same time.  This can be good for customers as they have the advantage of lower prices.  Small businesses may not be able to afford to compete.

Product differentiation is when a business tries to make their goods more attractive than the competition in terms of quality, service or price.  This includes a strong brand image, having a unique selling point, or a better design, appearance or location.