Good business management is not only a matter of how an individual deals with the factors they can control but about how they respond to the things they cannot. A wide variety of factors including consumer demand, the overall economy, the cost of raw materials, the political and legal landscape and the actions of competing companies have a direct impact on a firm's bottom line.
The overall economy is one of the most obvious external environmental factors that impacts businesses. No single business has a tremendous effect on the overall economy but businesses must always respond to economic changes. In a strong economy a business can exercise a great deal of flexibility in terms of prices, expenses and hiring. When the economy is doing poorly, incomes are down and unemployment is high. A business must be very careful about how it prices its products and services and exercise caution in terms of expenses.
Changes in consumer attitudes and demand can also impact business. For example, over the last few decades there has been an increasing demand for environmentally friendly products. Companies have had to respond to this demand in terms of what kind of products they produce, how those products are packaged and how and where they produce those products. Changes in consumers habits, lifestyles, tastes and popular fashion must all be taken into account in business.
Political and Legal
The external environment of a business is frequently impacted by the political and legal climate. Things like government regulation, sales tax, corporate taxes and import duties can all have an impact on a company's bottom line. Additionally environmental and health regulations can force changes in how a company does business. In some cases certain products or parts of those products can be banned or found to be unsafe which can force a recall of products. In other cases, imports from or exports to a given country can be cut off due to international politics.
A company's competitors are part of the external environment. No business has control over the products and services offered by competing firms or their prices, advertising, manufacturing, hiring, or sales methods. Competing companies will obviously be impacted by many of the same external environmental factors, such as political, social and economic changes. Some environmental factors can also differ. For example, companies based in different countries, or whose manufacturing takes place in different countries, are impacted in different ways by the political and economic environment. In the end, the outcome of competition frequently comes down to which company does the best job of adapting to its environment.