Business - External Influences.

Authors Avatar

Business – External Influences

                                                                - Gautam Kumar

Every business is part of an external network called the Environment. This network plays a large role in the way a business functions and is run. The effects of the environment on the business can be both a boon or a bane to the business.

         The External Environment in which a business operates can be categorically divided into various factors. A few that will be discussed here are :

  • Competition in the Market
  • Economic Environment
  • Political Environment
  • Population  (Sociological Environment)
  • Ecological Environment
  • Technological Environment

All these factors compose the External Environment. Every business needs to take all these factors into account when carrying out its operations because each one in its own way has a very real impact on the success of a business. However some businesses carry out the less comprehensive but still valuable PEST (Political, Economic, Sociological and Technological Environment) Analysis.

Competition in the Market:

On setting up and throughout the course of its existence, a business does constant research on the Market Structure of the market it operates within. This is the amount of competition that exists in a market. This is what determines the prices of the business’ goods or services.  

There are a number of standardized ‘Models of Competition.’ These models are calculated taking into account various sub-factors such as ease with which a business can set-up and leave the industry, consumer knowledge about products, number of firms, and the ability of a firm to fix prices on its goods or services. A few models are :

  1. Perfect Competition – Firms produce identical products;Consumers have perfect knowledge;No barriers to setup or leave industry;Each business can’t fix prices on products (Price Takers) (ex: Pens market)
  2. Monopoly – Of 2 types: Legal and Pure. Legal means the firm controls >25% of the market. Pure means the firm has 100% control of the market. Difficult for other firms to enter market;Monopolists can fix prices easily (Price Makers) (ex: US Postal Service)
  3. Monopolistic Competition – Large number of smaller firms control market;Very few barriers to entry;Brand identity plays big role;Limited Price Making. (ex: CK, Hilfiger, Levi’s)
  4. Oligopoly – Market dominance by few firms;Brand Identity;Some Price Making or Collusion;Barriers on Entry. (ex: Nokia, Pepsi)

Economic Environment:

        The function of a country’s (and world’s) economy affects the running of a business. An expanding economy means more money and more demand for a business’ products. A receding economy generally means less demand for a business’ products. However, for producers of inferior goods or services (Potatoes, Public Transport,etc), recessions provide an increase in demand. The way an economy operates is also sometimes intertwined with a government’s objectives.

Join now!

        Unemployment is very important for a business. If unemployment is very low, the labour market is ‘tight’ as few people have to fill in many posts and may have to raise wages. The supply of skilled labour is also not good. High unemployment on the other hand means that there is a much larger labour pool waiting to be tapped, so wages can be kept low. However, if the product is a luxury then demand will also definitely fall.

        Inflation is a persistent rise in the general price level. Businesses have to watch out for this as this leads ...

This is a preview of the whole essay