Understanding External Influences and Constraints on Business
The Eight Facets of the External Business Environment
Businesses do not operate in isolation; they exist within a complex framework of external influences and constraints known as the external business environment. According to Figure 1.18, there are eight primary facets that comprise this environment: competitive factors, social factors, technological factors, ethical factors, environmental factors, legal factors, political factors, and economic factors. Because businesses do not exist in a vacuum, they are constantly affected by changes and trends within these categories, which necessitates that they understand these external influences to respond effectively.
Social Factors and Demographic Trends
Social factors relate specifically to characteristics of the human population and evolving lifestyles. One major component is demographic issues, which are defined as issues relating to the size and structure of a population. Specific examples of these issues include an ageing population, changes in gender balance, and the average family size. Additionally, social factors encompass attitudes toward work, such as the increasing prevalence of flexible working patterns, home-working, and part-time working. Financial shifts also play a role through disposable income, which is defined as a person's total income minus taxes; this represents the actual amount a person has available to spend. Modern businesses must also account for social trends, such as anti-smoking and anti-obesity movements, concerns regarding food provenance, and the rising demand for organic food. Finally, cultural beliefs significantly impact business operations, including varying attitudes toward debt, the requirement for religious foods, and influences from overseas cultures.
Technological Factors and Innovation
Advancing technology has fundamentally transformed the ways in which society works, plays, learns, and shops. This transformation is driven by several key technological domains. Automation is a critical factor, defined as the replacement of human labour with machines. Examples of automation include production lines, robotics, ticket machines, and the implementation of CAD/CAM (). Purchasing and sales technology has evolved through e-commerce websites (which allow purchases to be made online), card readers, bar coding, computerised tills, and EPOS () stock control systems. Mobile technology has introduced contactless payment methods and smartphone apps, while communication technology has been revolutionized by email, text messaging, social media, and video conferencing. Video conferencing is specifically defined as the holding of virtual meetings using audio and video screens.
Environmental and Economic Factors
Environmental factors focus on the necessity of minimising damage to the planet. Businesses must manage aspects such as energy management, carbon emissions, waste reduction, recycling initiatives, and the control of pollution. Parallel to these environmental concerns are economic factors, which relate to the state of the economy. Interest rates are a primary economic factor, representing both the additional payment required to borrow money (the cost of borrowing) and the additional benefit received from saving money (the reward for investing savings). In the United Kingdom, interest rates are set by the Bank of England. Exchange rates represent the value of one currency as compared to another, such as the value of Sterling (the UK currency, also known as the British pound) against other currencies. Exchange rates affect imports (buying goods from abroad) and exports (selling goods to other countries) and fluctuate constantly based on supply and demand.
Additional economic variables include inflation, which is a general increase in the price of goods and services. The government calculates the inflation rate using a "basket of goods" that typical consumers purchase. Unemployment refers to people who are available for work but do not currently have a job. Finally, taxation is the amount of money individuals and businesses pay to the government. These funds allow the government to afford the operation of the country, providing essential services such as schools, hospitals, national defence, and street lighting. It is a common mistake to use the term "economical" when referring to these factors; "economic" relates to the state of the economy, while "economical" refers to obtaining good value for money.
Political and Legal Factors
Political factors pertain to the policies and practices of the government. This includes political instability, which refers to the chances of a government collapsing—a phenomenon more common in overseas markets. Businesses are also affected by a change of government, such as those resulting from a general election or a change in the Prime Minister. Furthermore, government initiatives, including new policies, grant funding, and various control measures, can significantly alter the business landscape.
Legal factors involve current legislation and the necessity for businesses to comply with the law. When studying legal factors, it is crucial to quote the names of legislation accurately. For instance, one should refer to the "Health and Safety at Work Act" rather than the simplified "Health & Safety Act." While exhaustive detail of every law is not always required, businesses must understand the general purpose of specific legislation and how it serves to protect various stakeholder groups.