Various internal and external factors affect the economic environment that a business operates in. The cost of labor, materials, processes and procedures, for example, have a massive impact on the bottom line. These are all internal factors since the company has control over them and can improve them through company projects. At the same time, certain external factors can also affect a company's chances of success. The business has less control over these factors and must work hard to account for them when positioning itself in the marketplace.
The primary influences on a business are: political, economical, social, technological, legal and environmental, which are often abbreviated to PESTLE.
The political environment affects the economic environment of businesses. Legislators at the local, state and federal levels may provide incentives or tax breaks to companies or they can impose regulations that restrict business transactions. In the latter case, for example, if a political body states that a company must include a certain chemical in its product, the cost of the product differs. The company passes those costs on to the customer in the form of higher prices. The customer must determine whether he wants to purchase that product. If he does not purchase the product, then the company does not receive the revenue. If a large number of customers decide not to purchase the product, the company may need to layoff employees.
The larger economic environment of a society is a factor that can affect a company's business environment. During a recession, consumers spend less on optional items such as cars and appliances. As a result, the business environment suffers. On the other hand, if the economic environment is one of prosperity, consumers are more likely to spend money, not just on necessities, but larger items as well.
Social factors that affect the economic environment of a business are the cultural influences of the time. For example, a fashion designer that creates bell bottom, striped pants will not succeed in an environment where straight-leg, solid colored pants are desired. A social environment that tends to be more conservative will not support styles that appear to be trendy. The fashion designer's business will suffer if he does not change the clothing style. The same would apply to the manufacturers that produce and stores that sell these wares.
Innovation and technology affect business environments. As technology advances, a business is forced to keep pace. For example, when computers were first invented, they were the size of a room. Users were forced to employ punch cards to perform basic functions. Today, computers that are much more powerful can fit into the palm of a hand. Businesses that do not keep up with technology risk increased costs of production and higher prices. If the company's cost to produce a product or service outpaces competitors, the company may soon find itself out of business.
Often, a business will need to change how it operates for legal reasons. This is often done when a company's lawyers anticipate a change in legislation, or it may be due to lawsuits, already filed or anticipated. For example, if a part in a machine is found to be defective, the company may need to issue a recall. If other companies in the same industry are being sued over something like a data breach of confidential information, a business may need to change how information is collected and stored.
The environment can have a direct and indirect affect on how a business operates. Businesses in the food industry are routinely affected by the environment. Droughts or disease can affect pricing models and even the ability of food processors, grocery stores and restaurants in obtaining sufficient supplies to meet consumer demands. Indirect environmental factors can affect any business by creating changes in societal expectations and government laws and regulations in efforts to protect the environment. For example, in 2016, California citizens voted for a law to ban the use of single-use plastic bags, affecting the majority of retailers in that state.