External Economic Influences

Friday, February 25, 2022 1:06:24 PM

External Economic Influences



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The External Business Environment

The figure below sums up the relationship among the participants in a business, its functional areas, and the external forces that influence its activities. Participants in a business must respond to the conditions created by a variety of external forces. Economic factors include things like strong economic growth cycles or recessions, consumer confidence and other economic indicators, interest rates and the strength of financial markets.

Government actions such as policies, regulation, tax code and legislation all impact businesses as well as their internal and external stakeholders. In order to serve customers effectively, it is essential to monitor consumer trends such as consumer spending, fads, fashions and buying behavior. Demonstrating strong corporate citizenship through ethical business practices helps ensure goodwill and a culture of trust among all stakeholders and society at large. The fast food industry provides a great example of how all these factors come together to affect business. A strong economy means people have more money to eat out at places where food standards are monitored by a government agency, the Food and Drug Administration.

Preferences for certain types of foods are influenced by consumer trends eating fried foods might be okay one year and out the next. Finally, a number of decisions made by the industry result from its desire to be a good corporate citizen. For example, several fast-food chains have responded to environmental concerns by eliminating Styrofoam containers. Economic factors are connected with goods, services, and money. Despite directly affecting businesses, these variables refer to financial state of the economy on a greater level — whether that be local or global. The reason for this is that the state of the economy can decide many of the important details that come up in an operating company, including topics such as consumer demand, taxes and asset value.

Interest rates — Interest rates might appear in a range of different places, imposed by a range of different people. Exchange rates — Exchange rates are a complicated topic, but they clearly have to apply to those who deal with export or import. Changing exchange rates might affect how much a company has to pay to its international supplier to satisfy them, which can affect profit margins, as well as take a lot of resources to stay on top of.

Recession — An economic recession of whatever scale has the potential to change the purchasing attitude of customers, which might force companies to drop their prices or clear smaller volumes. Another great way to learn to about how economic factors affect business is to look at PEST analyses which include them. For example:. In conclusion, economic factors are one of the many environmental, external factors which can affect businesses.

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