External factors affecting a business

Jupiterimages/Comstock/Getty Images

Businesses are affected by many factors, internal and external. The external factors that have the strongest affect on businesses are typically legal, political and economic. Businesses do not exist in a bubble. Rather, they exist as part of a community, in which they are responsible and accountable stakeholders.

Economic Factors

The most important external economic influence on a business is the level of competitiveness in its market. This factor determines how much profit a company can make. Other factors, like consumer demand, tax rates and interest rates, affect businesses by determining how much people are willing to pay for their products and how much of the resultant revenue must be given to the government.

Social Factors

Social factors determine what a business can and cannot do. Businesses that engage in racist marketing campaigns or abuse their employees may be subjected to boycotts, divestment campaigns, and other devastating forms of social backlash. Thus, social mores determine the informal rules that businesses must play by.

Legal Factors

Laws determine the formal rules that businesses have to play by. Business laws deal with competition: for example, no monopolies; employment: minimum wage; and taxation; among other things. Businesses that form illegal monopolies, for example, may be subjected to lawsuits and broken up into smaller businesses. Because the penalties for corporate malfeasance are so severe, most businesses take the law very serious.

Political Factors

Political issues occasionally come to influence the activities of the business community. Corporations often spend many billions of dollars lobbying to influence political decision makers for this reason. Businesses may get involved in politics, for example, when their international operations come under fire from human rights groups, or when a high-profile politician recommends an increase in corporate taxes.

Environmental Factors

Environmental factors have profound effects on the way businesses operate. The availability of natural resources in a given area determines whether resource companies could profit from operating there. The presence of pollution determines whether it is safe for businesses to put employees in a certain area. Environmental laws regulate the extent to which businesses themselves are able to pollute.