What are internal & external environmental factors that affect business?

Written by belinda tucker
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What are internal & external environmental factors that affect business?
Steep competition drives business to excel through innovation. (Thomas Northcut/Photodisc/Getty Images)

Various internal and external factors greatly influence a business' success. While it is practically impossible to control forces outside the business, like world economic conditions and capital availability, management must guide and inspire internal operations to ensure a competitive position in the marketplace. Adaptability and innovation are crucial to gaining market share and staying profitable in fluctuating economic climates.

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Operational Efficiency

Being competitive in a world market requires an innovative product or service, fair pricing and an excellent marketing plan. To meet these high standards, operational efficiency is required to keep the price competitive. A well-run business incorporates a shared goal to inspire a spirit of cooperation between departments.

Dynamic leadership is paramount for running a profitable business in challenging times. Financial managers ensure that cash flow is available to meet payroll and to pay overhead expenses. Marketing management drives sales revenue by developing creative and effective ways to entice the customer to buy. To round out the management team, human resources recruits qualified professionals needed to make conducting business possible.

Marketability and Innovation

Consumers expect value. Armed with access to data and product information, today's consumer demands innovation and effective customer service. Prices and features can be compared easily on the Internet, or over a cell phone. The informed consumer forces companies to evolve into transparent marketing machines. With constant reviews of new products between friends, consumers speak their mind on Facebook and Twitter, dealing both praise and deadly criticism with record speed. For these reasons, a company's ability to market a product well determines success or failure very quickly and definitively.

Economic Factors

No external factor affects a business more than economic conditions. When interest rates are high, and capital is expensive to borrow, businesses may stop expanding. Conversely, cheap money feeds business growth and innovation. When capital is scarce, the economy often shrinks in response, as businesses hoard cash reserves to weather recessions.

Favourable taxation rates similarly feed economic expansion and encourage hiring and growth. Business leaders are quick to modify optimistic plans when business taxes increase. This emphasis on lower taxes is why municipalities often offer substantial tax breaks to a business for several years, in exchange for business relocation into the area.

Exchange rates also play an influential role in business management decisions. With the global market expanding annually, exchange rates can encourage or discourage business growth. As the American trade deficit with China reached record levels in 2011, allegations of grossly undervalued Chinese currency had many American professionals crying foul, as Chinese businesses undercut American pricing.

Competition

Competition shapes the business landscape, as company executives create business strategies based on other firms' actions. Gaining market share is the goal of all corporate executives as they contemplate the next quarterly shareholder's meeting. The obvious way to accomplish growth objectives is to take market share from an inferior competitor. Increasing promotional budgets to outspend a smaller competitor is one technique aggressive companies use to buy market share. Another proven strategy for forcing a competitor out of the market to gain market share is to temporarily price a product or service artificially low. Larger companies often run smaller companies out of the marketplace by pricing them out of business.

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