External Forces that Influence Business Activities

Appe and other businesses do not operate in a vacuum; they are influenced by a number of external factors. These include the economy, government, consumer trends, information technology, legal factors, public pressure to act as good corporate citizens, and other factors. Collectively, these forces constitute what is known as the macro environment – essentially the big picture world outside over which the business exerts very little if any control.

“Business and Its Environment” sums up the relationship between a business and the external forces that influence its activities. One industry that’s clearly affected by all these factors is the fast-food industry. Companies such as Taco Bell, McDonald’s, Tim Hortons and others all compete in this industry. Here are a few statements to show the way external factors impact business. For instance, a strong means people have more money to eat out. Food standards are monitored by a governmentagency, the Canadian Food and Drug Inspection Agency at the federal level with entities at both the provincial and municipal levels following through with adherence. Preferences for certain types of foods are influenced by consumer trends (fast food companies are being pressured to make their menus healthier).

How Governments Influence The Economy and Businesses

In a planned system, the government exerts control over the allocation and distribution of all or some goods and services. The system with the highest level of government control is communism. In theory, a communist economy is one in which the government owns all or most enterprises. Central planning by the government dictates which goods or services are produced, how they are produced, and who will receive them. In practice, pure communism is practically nonexistent today, and only a few countries (notably North Korea and Cuba) operate under rigid, centrally planned economic systems.

Under socialism, industries that provide essential services, such as utilities, banking, and health care, may be government owned. Some businesses may also be owned privately. Central planning allocates the goods and services produced by government-run industries and tries to ensure that the resulting wealth is distributed equally. In contrast, privately-owned companies are operated for the purpose of making a profit for their owners. In general, workers in socialist economies work fewer hours, have longer vacations, and receive more health care, education, and child-care benefits than do workers in capitalist economies. To offset the high cost of public services, taxes are generally steep. Examples of countries that lean towards a socialistic approach include Venezuela, Sweden, and France.

The economic system in which most businesses are owned and operated by individuals is the free market system, also known as capitalism. In a free-market economy, competition dictates how goods and services will be allocated. Business is conducted with more limited government involvement concentrated on regulations that dictate how businesses are permitted to operate. A key aspect of a free market system is the concept of private property rights, which means that business owners can expect to own their land, buildings, machines, etc., and keep the majority of their profits, except for taxes. The profit incentive is a key driver of any free-market system.

In comparing economic systems, it can be helpful to think of a continuum with communism at one end and pure capitalism at the other, as in Figure 3 “Economic Spectrum” below. As you move from left to right, the amount of government control over business diminishes. So, too, does the level of social services, such as health care, child-care services, social security, and unemployment benefits. Moving from left to right, taxes are correspondingly lower as well.

Though it’s possible to have a pure communist system, or a pure capitalist (free market) system, in reality, many economic systems are mixed. A mixed market economy relies on both markets and the government to allocate resources. In practice, most economies are mixed including Canada’s, with a leaning towards either free-market or socialistic principles, rather than being purely one or the other.  Arguably Canada is a free-market-leaning mixed economy.  Some previously communist economies, such as those of Eastern Europe and China, are becoming more mixed as they adopt more capitalistic characteristics and convert businesses previously owned by the government to private ownership through a process called privatization. By contrast, Venezuela is a country that has moved increasingly towards socialism, taking control of industries such as oil and media through a process called nationalization.

External Factors Examples

• Government can influence business in many ways.  The article Short-term rental regulations are coming to Halifax this fall.^[1]  discusses changes to shot term rental regulations in Halifax, Nova Scotia and the impact on current renters.  Business responses to external forces such as government regulations can represent opportunities and challenges.
• In January, 2017, Ontario become the first province in Canada to require food service providers with 20 or more locations in the province — such as restaurants, coffee shops, convenience stores, grocery stores, and movie theatres — to include the number of calories for each food and beverage item on their menus, labels or tags.
• In 2023 Italy unexpectedly imposed a one-off 40% tax on the profits banks earn from higher interest rates.  They later backed off on the tax somewhat.  Both of these regulations – examples of external factors – can have a huge effect on businesses.

Industry Stakeholders

Finally, some decisions made by industry stakeholders result from a desire to be a good corporate citizen. For example, several fast-food chains have responded to environmental concerns by eliminating Styrofoam containers on their own without legislation to force them. Of course, all industries, not just the rental or food industry, are impacted by external factors. As people have become more conscious of the environment, they have begun to choose new technologies, like all-electric cars to replace those that burn fossil fuels. Established companies like Nissan, with its Nissan Leaf, and brand new companies like Tesla have entered the market for all-electric vehicles. The global electric vehicle market was valued at US$ 113.6 Bn in 2020. It is estimated to expand at a Compound Annual Growth Rate (CAGR) of 26.62% from 2021 to 2031. ^[2]

The figure below sums up the relationship between a business and the outside forces that influence its activities. One industry that’s clearly affected by all these factors is the fast-food industry. Companies such as Taco Bell, McDonald’s, Cook-Out, and others all compete in this industry. A strong economy means people have more money to eat out. Food standards are monitored by a government agency. Preferences for certain types of foods are influenced by consumer trends, for example, fast food companies are being pressured to make their menus healthier. 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.

Of course, all industries are impacted by external factors, not just the food industry. As people have become more conscious of the environment, they have begun to choose new technologies, like all-electric cars to replace those that burn fossil fuels. Both established companies, like Nissan with its Nissan Leaf, and brand new companies like Tesla have entered the market for all-electric vehicles. While the market is still small, it is expected to grow at a compound annual growth rate of 19.2% between 2013 and 2019.

PESTEL Analysis^[3]

One useful tool for analyzing the external environment in which an industry or company operates is the PESTEL model. PESTEL is an acronym, with each of the letters representing an aspect of the macro-environment that a business needs to consider in its planning. Let’s briefly run through the meaning of each letter.

• P stands for the political environment. Governments influence the environment in which businesses operate in many ways, including taxation, tariffs, trade agreements, labor regulations, and environmental regulations.
• E represents the economic environment. As we will see in detail in a later chapter, whether the economy is growing or not is a major concern to business. Numerous economic indicators have been created for the specific purpose of measuring the health of the economy.
• S indicates the sociocultural environment, which is a category that captures societal attitudes, trends in national demographics, and even fashion trends. The term demographics applies to any attribute that can be used to describe people, such as age, income level, gender, race, and so on. As a society’s attitudes or its demographics change, the market for goods and services can shift right along with it.
• T is for technological factors. In the last several decades, perhaps no force has impacted business more than the emergence of the internet. Nearly instantaneous access to information, e-commerce, social media, and even the ability to control physical devices from remote locations have all come about due to technological forces.
• The second E stands for environmental forces, which in this case means natural resources, pollution levels, recycling, etc. While the attitudes of a society towards the natural environment would be considered a sociocultural force, the level of pollution, the supply of oil, etc. would be grouped under this second E for environment.
• Finally, the L represents legal factors. These forces often coincide with the political factors already discussed, because it is politicians (i.e., government) that enacts laws. However, there are other legal factors that can impact businesses as well, such as decisions made by courts that may have broad implications beyond the case being decided.

When conducting PESTEL analysis, it is important to remember that there can be considerable overlap from category to category. It’s more important that businesses use the model to thoroughly assess its external environment, and much less important that they get all the forces covered under the “right” category. It is also important to remember that an individual force, in itself, is not inherently positive or negative but rather presents either an opportunity or a threat to different businesses. For example, societal attitudes moving in favor of green energy are an opportunity for those with capabilities in wind, solar, and other renewables, while presenting a threat, or at least a need to change, to companies whose business models depend exclusively on fossil fuels.

As you read through the description of the PESTEL model, it may have occurred to you to ask, “Where would COVID-19 fit in using this model?” since this pandemic had a major impact on all sorts of businesses and on every economy in the world. In other models that analyze the macro-environment, there is a force called “Natural” that essentially equates to the environmental force in the PESTEL model. So, the natural environment is usually equated to the forces described above, like natural resources and pollution, but a broader view of this force would logically include something like a pandemic. And consistent with other types of forces, COVID-19 has been hugely unfavorable to some industries and yet a boost to business for others. Any business in the realm of tourism has probably suffered large revenue losses and employee layoffs and furloughs, while makers of personal protective equipment (PPE)^{[4] [5]} have been challenged just to meet the increase in demand.

Video

This video by Alyssa Duong describes the six macro-environmental forces that make up the PESTEL model. It offers a fun perspective – check it out!

As you move through this text, you’ll learn more about these external influences on business and how they are critically important for any sized organization.