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External Factors of a Business: Definition & Explanation

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  • 0:01 What Are External Forces?
  • 0:27 Types of External Forces
  • 5:03 Other Factors
  • 5:56 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

Businesses are impacted by a number of factors, some internal and some external. While managers may not be able to control external forces, it is essential they identify and understand them.

What Are External Forces?

No business operates in a vacuum. Even the most powerful monopoly - a business with essentially no competition - needs to pay attention to factors outside the organization that are beyond their control. These factors impact each business and industry differently, which only increases the importance of managers understanding these external forces.

Types of External Forces

There is no shortage of frameworks and acronyms that attempt to summarize the types of external forces that impact businesses. One of the most common - and simple - is PEST which stands for political, economic, social, and technological. It's easy to remember because to many managers, factors that impact their success so much but that can't be controlled are exactly that - a pest! This image represents the PEST framework.

Political

Political forces include regulatory requirements, legal concerns, and any impact from the current political climate of the country or region where the business operates. For example, beginning in 2008, health care companies began anticipating dramatic changes to the US health care system as President Obama made health care reform his top priority.

Political forces do not only exist in the home country of a business. Many US companies operate in China, a country where the government has much more influence over business behaviors. These US companies must be aware of the political pressures in China if they want to be successful in that attractive market.

Economic

The financial crisis of 2007-2008 demonstrated the impact that economic forces can have on companies. Businesses that had nothing to do with banking or the housing industry saw their revenues drop, sometimes dramatically, as unemployment rose and disposable income dropped. Those companies that were in the financial and housing industries were fighting for survival every day - a battle that some 100-year old companies lost, such as Lehman Brothers and Bear Sterns.

Any change in the economy that impacts the supply or demand for a company's products and services fits into this category. Sometimes they have a positive impact, like when a country's gross domestic product (GDP) increases more than expected. Other times, economic forces can hurt a business, like when consumer confidence drops, and potential customers spend less and save more.

Social

Social factors are those that reflect the preferences, fads, and trends in society. Media companies are very sensitive to social trends as their business model is to produce content that reflects society's interests. Reality TV, unheard of 20 years ago, is now some of the most watched productions in prime time. Social trends often follow technological trends. For example, technological forces made email possible, but once available, society quickly demonstrated the preference to email over sending a letter or making a phone call.

Technological

Advancement in technology has had a dramatic impact on the business world over the last two centuries, and especially over the last 30 years. Anticipating changes in technology and capitalizing on those changes can become a competitive advantage - like when Apple anticipated the shift away from CDs to electronic media and introduced the iPod. That single product innovation put Apple on the road from a failing company with a stock price of $6 in 2001 to the largest company in the world and a stock price of over $700 in the fall of 2012.

While anticipating technological changes can transform a company, ignoring those forces can destroy a company. Kodak was the market leader in photography and film until the 1990s when digital cameras started becoming popular. Kodak managers saw digital photography as a fad, believing that consumers will always prefer hard copies of their photos. Wrong! While Kodak still exists today, it is not much more than an afterthought in the digital media industry.

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