External influences on the firm

The business environment

There are six dimensions to the business environment:

1. Political/legal factors 2. Economic factors:
The microeconomic environment The macroeconomic environment

3. Social/cultural factors 4. Technological factors 5. Legal 6. Ethical & Ecological factors

PESTLE ANALYSIS
The division of the factors affecting a firm into Political, Economic, Social, Technological, Legal and Ecological is known as a PESTLE analysis. This is widely used by business enterprises to audit their environment and to help them establish a strategic approach to their business activities.

Political/Legal Factors:
Firms will be directly affected by the actions of government and other political events.
These might be major events affecting the whole of the business community, such as collapse of communism, War, or a change of government. Or may be actions affecting just one part of the economy. Similarly, businesses will be affected by the legal framework in which they operate. Such as industrial relations legislations, product safety standards, regulations governing pricing in the privatised industries and laws preventing collusion between firms to keep prices up.

Economic Factors
They can range from big to small, from local to national to international, from current to future; from the rising cost of raw materials to the market entry of new rivals, from the forthcoming Budget to the instability of international exchange rates to the likely future cash flows from a new product.

Microeconomic Environment
This includes all the economic factors that are specific to a particular firm operating in its own particular market.

Macroeconomic Environment
This is the national and international economic situation in which business as a whole operates. Businesses in general will do much better if the economy is growing than if it is in recession. Government policies such as taxation, interest rates and exchange rates will have a major impact on firms.

Social/cultural Factors
This includes social attitudes and values, such as attitudes towards working conditions, the length of the working day, equal opportunities and the use and abuse of animals and images portrayed in advertising. These trends have had a big impact on the actions of business and the image that many firms seek to present.

Technological Factors
They have a huge impact on the way firms produce products, but also on how business is organised. The use of robots and other forms of computercontrolled production has changed the nature of work for many workers. It has also created rapid communication and a wide range of opportunities, many of which are yet to be realised.

Ethical and Ecological

Ethical considerations have become an increasingly important influence on business behaviour. One area where this has been manifest is in the demand for firms to act in a more socially responsible way and to consider the impact they might have on people, their communities and the natural environment

To be successful, a business will need to adapt to these changes and if possible take advantage of them.
Ultimately, the better business managers understand the environment in which they operate, the more likely they are to be successful,either in exploiting ever changing opportunities or in avoiding potential opportunities.