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What Are Internal & External Environmental Factors That

Affect Business?
A business concept that looks perfect on paper may prove imperfect in the real world. Sometimes
failure is due to the internal environment – the company's finances, personnel or equipment.
Sometimes it's the environment surrounding the company. Knowing how internal and external
environmental factors affect your company can help your business thrive.

External: The Economy

In a bad economy, even a well-run business may not be able to survive. If customers lose their jobs
or take jobs that can barely support them, they'll spend less on sports, recreation, gifts, luxury goods
and new cars. High interest rates on credit cards can discourage customers from spending. You
can't control the economy, but understanding it can help you spot threats and opportunities.

Internal: Staff

Unless you're a one-person show, your employees are a major part of your company's internal
environment. Your employees have to be good at their jobs, whether it's writing code or selling
products to strangers. Managers have to be good at handling lower-level employees and overseeing
other parts of the internal environment. Even if everyone's capable and talented, internal politics and
conflicts can wreck a good company.

External: Competition

Unless your company is unique, you'll have to deal with competition. When you start your company,
you fight against established, more experienced businesses in the same industry. After you establish
yourself, you'll eventually have to face newer firms that try to slice away your customers.
Competition can make or break you – look at how many brick-and-mortar bookstores crashed and
burned competing with Amazon.

Internal: Money

Even in a great economy, lack of money can determine whether your company survives or dies.
When your cash resources are too limited, it affects the number of people you can hire, the quality of
your equipment, and the amount of advertising you can buy. If you're flush with cash, you have a lot
more flexibility to grow and expand your business or endure an economic downturn.

External: Politics

Changes in government policy can have a huge effect on your business. The tobacco industry is a
classic example. Since the 1950s, cigarette companies have been required to place warning labels
on their products, and they lost the right to advertise on television. Smokers have fewer and fewer
places they can smoke legally. The percentage of Americans who smoke has dropped by more than
half, with a corresponding effect on industry revenues.

Internal: Company Culture

Your internal culture consists of the values, attitudes and priorities that your employees live by. A
cutthroat culture where every employee competes with one another creates a different environment
from a company that emphasizes collaboration and teamwork. Typically, company culture flows from
the top down. Your staff will infer your values based on the type of people you hire, fire and promote.
Let them see the values you want your culture to embody.

External: Customers and Suppliers

Next to your employees, your customers and suppliers may be the most important people you deal
with. Suppliers have a huge impact on your costs. The clout of any given supplier depends on
scarcity: If you can't buy anywhere else, your negotiating room is limited. The power of your
customers depends on how fierce the competition for their dollars is, how good your products are,
and whether your advertising makes customers want to buy from you, among other things.

The Decision-Making Process in an Organization


Decision-making is one of the most important aspects of your small business, but the process of
arriving at a decision must be precise, so that it will yield the best results. It’s also important to
remember that even though you and your executive team will make the major decisions, there are a
number of smaller decisions that your managers and staff members will make, sometimes without
your input. To ensure that decision-making is uniform throughout your organization, you should
implement a process that everyone can follow.

Understand the Decision You Have to Make

This may seem obvious, but the first step in making a decision is the realization that a decision is
necessary. In other words, you have to identify and define the type of decision that needs to be
made, and how it will change your work process, or improve a product or service for your customers.

Collect All the Information

Proper decision-making requires an evaluation of all the information and data that you can gather.
For example, if you own a marketing consulting firm and you’re considering a pay-per-click
advertising campaign, you would want to have information, such as which keywords do customers
use the most when searching results related to consulting. In some instances, the information you
need is internal (within your organization), and in other instances, you will obtain that information
from external sources.

Identify All Alternatives

After you’ve analyzed the information, you must develop several different options regarding the
decision you have to make. Using the same example from earlier, you may decide on alternatives,
such as display ads, cost-per-thousand ads or re-marketing.

Evaluate the Pros and Cons

Analyzing each alternative for its pluses and minuses can help you eliminate which possible decision
is the wrong one. Your goal in this step is to identify the options that give you the best chance of
success and the least chance of failure. In some instances, there isn’t much difference between two
options, which means you should consult with your executive leaders to determine which option they
like best, and then to rank them in descending order.

Select the Best Alternative

After you’ve ranked your options, you must choose the one that you think has the strongest chance
of achieving your goal. In some instances, you can combine several options, but in most cases,
there will be a clear-cut direction you want to take.

Make the Decision

A decision is simply a choice until you put it into action. This means that you must understand the
resources available to help that decision become successful. You may need to have several
meetings with your managers and team leaders to explain your decision to them, and how it will
affect their daily tasks or how it will affect your clients and customers.

Evaluate the Impact of Your Decision

It’s critical for you to evaluate your decision after sufficient time has passed, so that you can analyze
the effectiveness of the choice you made. The biggest question you must ask is this: Did your
decision resolve the problem, the need or the issue it was meant to address? If you can answer,
“Yes” to this question, then your work is done. If the answer is “No,” then you may need to identify
what went wrong and repeat the decision-making process.