External Forces that Influence Business Activities

Apple and other businesses don’t operate in a vacuum: they’re influenced by a number of external factors. These include the economy, government, consumer trends, technological developments, 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.

Infographic showing a company surrounded by its environmental forces: demographic, natural, economic, political, cultural, and technological
Figure 2: The company surrounded by its environmental forces: demographic, natural, economic, political, cultural, and technological. Source: All icons from the Noun Project

“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 economy means people have more money to eat out. Food standards are monitored by a government agency, 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.


An open, double ended arrow labeled “The Economic Spectrum”. The left side is labeled “Pure Communism” and the right side is labeled “Pure Free Market Capitalism.” Inside the middle of the arrow is a heading labeled “Mixed Economies” with a left heading of “Socialism,” a right heading of “Libertarianism”, and a middle heading of "Centralism." Underneath the arrow are example countries, with lines from the names toward the larger arrow to indicate where they lie on the spectrum. From left (Pure Communism) to right (Pure Free Market Capitalism) to countries read: North Korea, China and Morocco, France and Sweden, United States and Japan, New Zealand.
Figure 3: Economic Spectrum

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.


Government can influence business in many ways.  This example shows the large-scale impact of external forces such as government regulations. The Ministry of Health and Long Term Care’s Newsroom on December 30, 2016:

Starting January 1, 2017, Ontario will be 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.

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. [1]

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.

A list of the PESTEL Analysis process. Each item is contained inside an arrow pointing right spelling PESTEL from Top to bottom. From P to L the steps are: P) Political: the impact of government including taxes, tariffs, trade agreements, and labor regulations. E) Economic: includes inflation, employment rates, exchange rates, oil prices, GDP growth and others. S) Sociocultural: includes cultural attitudes and demographic factors such as age, race, and income. T) Technological: includes the impact of the internet, smart devices, and automation on business and technology. E) Environmental: includes availability and care for natural resources, pollution levels, and carbon footprints. L) Legal: requirements related to labor and consumer protection, equality, and product safety.
Figure 2.3: Business and it’s environment – PESTEL

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[2]

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)[3] [4] have been challenged just to meet the increase in demand.


This video by Alyssa Duong covers the six macro-environmental forces that make up the PESTEL model.


As you move through this text, you’ll learn more about these external influences on business.


Key Takeaways

  • The main participants in a business are its owners, employees, and customers.
  • Every business must consider its stakeholders, and their sometimes conflicting interests, when making decisions.
  • The activities needed to run a business can be divided into functional areas. The business functions correspond fairly closely with many majors found within a typical college of business.
  • Businesses are influenced by such external factors as the economy, government, and other forces external to the business. The PESTEL model is a useful tool for analyzing these forces.

  1. Transparency Market Research. (2014, July). Electric Vehicles Market (on-road) (hybrid, plug-in, and battery) – Global Industry Analysis, Size, Share, Growth, Trends and Forecast, 2013 – 2019. Retrieved from: http://www.transparencymarketresearch.com/electric-vehicles-market.html
  2. Content added from Chapter 2 of Fundamentals of Business, 3rd edition by Stephen J. Skripak and Ron Poff CC BY-NC-SA
  3. Rogers. K. and Spring, B. (2020). “Personal Protective Equipment Is in High Demand as Coronavirus Spreads.” CNBC. Retrieved from: https://www.cnbc.com/2020/03/06/personal-protective-equipment-is-in-high-demand-as-coronavirus-spreads.html
  4. Borden, T. & Akhtar, A. (2020). “The Coronavirus Outbreak Has Triggered Unprecedented Mass Layoffs and Furloughs. Here Are the Major companies That Have Announced They Are Downsizing Their Workforces.” Business Insider. Retrieved from: https://www.businessinsider.com/coronavirus-layoffs-furloughs-hospitality-service-travel-unemployment-2020#airbnb-announced-it-is-laying-off-about-25-of-its-workforce-or-1900-employees-on-may-5-its-severance-package-includes-several-months-pay-a-year-of-healthcare-and-support-finding-a-new-job-2


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