Environmental Factors Affecting Business

Whenever the environment is mentioned, most people think about going green, avoiding pollution and other factors that concern the physical environment. However, when we talk about the 'business environment' we are referring to many more aspects. In business the environment covers all external factors that affect the value of the business.

But why should any employee need to know about politics or technical developments - or any of the other environmental factors?

There are two main reasons:

  1. You will become aware of changes that affect your own job / career in the future. This can be positive (e.g. offering better career choices) or negative (e.g. developments that could make your work redundant) - either way you can plan future career moves with more success.
  2. You will also become aware of changes that affect your business employer. Employees with wider business knowledge are highly desirable as they are often able to provide ideas and solutions to improve the business as a result of potential changes in the business environment.

So far there are no obvious downsides to imporving your business awareness but what is the best way to do this?

A common tool to determine these environmental factors is a PESTLE analysis (PESTLE is an acronym for Political factors, Economic factors, Social factors, Technical factors, Legal factors and Environmental factors).

These are outlined below:

Political factors

The political situation covers many varied, extensive and yet vital areas. The politics of a country determines whether it is safe for the organisation to conduct business for the employees, clients and its own future development.

Another political factor is the legislation that governs the industry in which the business sits. This affects the registration, operation and trading of the business. The government may also have an interest and influence over the business, its associations and clients e.g. those delivering services to the public on behalf of the government (i.e. the public or society) such as health, transport or education.

Politics may also affect other areas, such as export controls and waste disposal, which may in turn affect the business. Finally, taxes and tax laws are also an important consideration.

Economic Factors

The economic factors that affect the business market include inflation, access to credit, interest rates, taxes and the country's economic situation. All of these must be considered when analysing the economic situation of the region where the business is located.

Social Factors

Every society has different values which can affect the business. Organisations need to learn the cultural values of the society in which the business is located or where the primary market is to be. If they get this wrong, and don’t make the necessary adjustments, it can have a detrimental affect on the business. Social factors cover a broad, and often changing, range of influences such as religion, education, gender, cultural norms and expectations, health consciousness, population growth rate, age distribution and career attitudes.

Technological Factors

Technology has grown tremendously over the years and there are no signs that it will stop. It has made many aspects of business convenient and far easier to manage than they ever were. It can create new jobs and eliminate others. All businesses should assess new technological advancement in their field how it might affect their business. If ignored these advancements in technology can make a business obsolete in the blink of an eye.

Legal Factors

The law is not fixed. Legislations that affect businesses are written, amended and passed all the time. There are local, national and international laws that must be considered. All businesses need to be aware of these legislations and their impact on its development. Even if specific relevant laws do not change, the business needs to make sure that they are always compliant. Examples include legislation on employment, patent filing, infringement legislations and health and safety as well as product regulation legislations.

Environmental Factors

Finally, the one factor that most people think of when the environment is mentioned! Moving away from the general environment, the actual physical environment of the business is also critical. The location of the business can influence the cost of production (due to availability and transport of raw materials), marketing strategies (e.g. location of a store or restaurant or placement of advertising billboards), profit margins (e.g. local salaries, cost of energy or local-global conversion rates). The physical environmental factors that spring to mind (e.g. the weather, recycling and renewables) can also affect the business (e.g. production costs, raw materials and energy).

The depth and range of a PESTLE analysis will depend on the type of business you work in. An energy business for instance would lean more on the political factors, legal factors and environmental factors. An agricultural business would have to put more emphasis in the analysis of climatic conditions and such.

As you can see the business environment is vast and all inclusive and should be considered at great length as it affects the business in many ways.