Have you noticed that businesses, their products, and the ways they operate change over time? For example, several years ago Cadbury did not offer vegan chocolate bars and McDonald’s did not offer vegan burgers. Both of these brands developed vegan options as a result of external factors, which in this case, were new diet trends. However, there are many other factors that influence businesses.
Technological influences on business
The rapid development of technology has had a huge impact on businesses and the way they operate.
Fig. 1 - Technological influences on business
Here, the main aspect relates to communication, which, for a business to run smoothly, has to be effective. A system that has certainly transformed the ways communications are done in businesses is information and communication technology.
Information and communication technology (ICT) is a computing and communication system used by businesses to convey information to their stakeholders.
ICT is used by businesses to communicate with their employees, suppliers, customers, and Government organizations.
Technology and business operations
There are two main aspects the development of technology has had the biggest impact on:
Network of employees – previously, it was impossible for a company to employ people that were based in a different city, country, or continent. Owing to the development of technology, they are now able to take on people from all over the world.
Information handling – technology has also changed the way businesses store information. As a result of being able to collect information through the internet and other technologies, not only is it easier to receive information, but it is also easier to analyse it to then take action and improve products when needed.
E-commerce
You must have noticed that currently many goods and services can only be purchased online.
E-commerce (electronic commerce) refers to buying and selling of products through the internet.
Amazon sells its products through the internet. It only recently introduced physical grocery stores (Amazon Fresh) and customers can only purchase most products sold on the website online.
Ethical and environmental influences on business
Every business has certain ethical practices and environmental factors that it is influenced by.
Business ethics
Business ethics refer to business morals, policies, and practices that guide business decisions and actions.
Business ethics are generally accepted principles that cover the business' interaction with customers, the treatment of its employees, its interaction with other businesses and the Government, and how it deals with negative publicity. These principles can be accountability, care, honesty, loyalty, respect, and many others.
Nowadays many multinational corporations place emphasis on diversity in the workplace. In doing so, they aim to employ people of different backgrounds, genders, social groups, races, etc.
Business environment
Business environment is the sum of all events, factors, and conditions, internal or external, that influence business activities.
The business environment refers to everything that is happening around the business. It provides inputs in the form of either regulations, reviews, or needs to the business, and the business, in turn, provides outputs to the environment in form of its products or other services.
Government regulations, health and safety regulations, economic situation, political environment, technology changes, environment culture, customers demand, demographics, and tax rates are environmental factors that can affect the business.
The economic influences on business
Another factor that can highly influence a business is the economic climate.
Fig. 2 - The economic climate of a market will have significant impact on the business
Economic climate
The economic climate describes the state of the economy.
Simply put, it refers to how the economy in which a firm operates is doing. The economic climate considers factors such as the number of goods and services produced, the affordability of goods and services, and the availability of jobs.
It is important to note that the economic climate tends to change. It may either improve or weaken. If levels of production, consumer income and spending, and employment rise, the economic climate will improve. However, if they fall, the economic climate will weaken.
The economic factors that can highly influence a business are interest rates, level of employment, and consumer spending.
Interest rates
Interest rates are the cost of borrowing money expressed as a percentage.
Low-interest rates are very favourable for businesses. This is because then they can borrow money to purchase products and equipment necessary to operate without paying excessively high fees. What is more, low-interest rates encourage customers to take out loans and spend money on products manufactured by businesses.
Level of employment
Level of employment is the number of people engaged in productive activities in an economy.
The level of employment indicates the number of people in a country that have jobs and earn money. For businesses, a high level of employment means that they employ more people who produce more goods and services. Moreover, it means that customers earn more money and are more likely to spend it on a business's goods and services.
Consumer spending
Consumer spending is the value of goods and services bought by consumers over a time period, usually a month or a year.
As the name suggests, consumer spending refers to money customers spend on goods or services offered by businesses. Of course, the more they spend, the better for businesses.
Globalisation influences on business
Globalisation has had a huge impact on businesses in the twenty-first century.
Globalisation is the growing integration of the world's economies, populations, and cultures. It implies the increasing interaction among people, companies, and Governments worldwide.
The main outcomes of globalisation include international trade, migration, and multinational corporations.
International trade
International trade refers to the buying and selling of goods and services across borders. Over the last decades, more and more countries have been importing and exporting products from and to other countries. Owing to this, regardless of the country they operate in, companies can use products that are manufactured in any part of the world.
Migration
Migration is the movement of people from one place to another with the intention of settling in a new place. Due to fewer opportunities, poor living conditions, and/or political situations in some countries, citizens have decided to leave and seek opportunities in other countries.
Countries with high levels of immigration include the world’s biggest economies such as the United Kingdom, Germany, and the United States. This is because in these countries immigrants can find well-paid jobs and afford a better living.
Multinational corporations
Multinational corporations are companies that operate in at least one country other than their home country.
Nowadays companies can easily move their operations abroad. This has been caused by the development of technologies that allow communication between employees in different countries and the development of transportation that allows entrepreneurs to travel and maintain activities in numerous locations.
McDonald’s is a fast-food restaurant that serves customers all over the world. It operates not only in its mother country of the United States but also in many other countries including the UK.
Legislation influences on business
Everyone in society, including businesses, has to follow the law.
Fig. 3 - Businesses have to follow many legal formalities to follow
Legislation, in other words, law, lays down a set of rules that govern the way society operates.
Legislation ensures that businesses are not exploiting customers or employees. It also protects businesses from fraudsters or from anticompetitive market conditions like monopolies.
The main laws that affect businesses are consumer law and employment law.
Consumer law
Consumer law, also customer protection law, refers to laws that prevent businesses from treating their customers unfairly. It protects customers against issues such as fraud or 'miss-selling' when they buy a product or service.
Employment law
Employment law is the legal agreement between employers and employees which defines and regulates their relationship. It focuses on aspects such as payment, discrimination, recruitment, and working conditions.
Competitive environment influences on business
For a competitive environment to exist, there must be at least two businesses that try to attract customers in the same market.
A market is a place where there are buyers and sellers. They come together to make transactions and exchange goods and services.
Competition can be more or less fierce, depending on how many competitors there are and how much market share they have. However, typically, businesses that offer similar products compete the most fiercely with one another.
These are the three most common ways companies compete with each other:
Price – offering prices lower than competitors,
New products – developing new products different from competitors' products,
Advertising – promoting products and brands through various channels.
Sainsbury’s and Aldi continuously compete with each other. Both supermarkets try to lower their prices and develop new products to attract customers. Additionally, they keep promoting them wherever possible.
As you can see, technology, ethics, environment, economy, globalisation, legislation, and the competitive environment all have an influence on businesses. These external influences all have significant impacts on the business and its operations.
Influences on Business - Key takeaways
- Businesses are influenced by many external factors such as technology, ethics, environment, economy, globalisation, legislation, and the competitive environment.
- Technological developments have transformed the way communication is conducted in business and has led to the emergence of e-commerce.
- Business ethics refer to business morals, policies, and practices that guide business decisions and actions.
- The economic climate describes the state of the economy. It considers factors such as the quantity of goods and services produced, the affordability of goods and services, and the availability of jobs.
- Globalisation is the growing integration of the world's economies, populations, and cultures. It has led to the emergence of multinational corporations, which are companies that operate in at least one country other than their home country.
- The main laws that affect businesses are consumer law and employment law.
- A competitive environment is defined as an environment in which at least two businesses try to attract customers in the same market.
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