External Business Environment
External environment: refers to condition that affect business operations from outside.
Business organizations do not operate in isolation.
They operate in environments where there are external factors which are likely to affect
their operations.
Some external environmental conditions offer business opportunities while others may
create problem.
Business have limited or no control over external environment.
External environment also known as macro environment.
Macro environmental factors may include the following:
Economic Environment
Demographic Environment
Legal Political Environment
Technological Environment
Cultural Environment
Physical Environment
Competitive Environment
1) Economic Environment
These are factors that affect buyer’s ability to buy the goods and service offered by a
business.
This include changes in buyer’s income, change in prices of other related goods and
services.
If the buyer’s ability (purchasing power) to buy increases, the business is likely to sell
more.
On the other hand if the buyer’s ability decreases the sales volume of the business may go
down.
2) Demographic Environment
This refers to population change. Such a change may include the size of the population,
age and sex distribution, birth and death rates. A growing population for example creates a
wider market for goods and services.
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If people are migrating from rural to urban areas, it means that in the near future, majority
of the people will be living in towns, thereby reducing the demand for goods and services
in the rural areas.
3) Legal and Political Environment
The government closely monitors businesses and passes laws and policies that regulate
their activities. Many business decisions are hence made only after careful analysis of
consequences of these laws and policies.
For example: a business person may invest in area A instead of area B because area A
has tax advantages, like lower tax rate or even no taxes for a given period of time.
4) Technological environment
Technology may refer to levels of know how efficiency use of tools and equipment and
other resource. Advancement in technology will lead to better quality goods and services.
If the business uses auto dated technology, while other firms using modern technology,
consumers will tend to go for the goods and services produced other firms.
This may have a big impact on the business which may lead to its closing down
5) Cultural environment
Culture: refers to norms that regulate behaviors of people in a society.
It includes customs, values and beliefs that are shared by a given society and passed on
from one generation to on other.
Culture dictates how people live and what products they consume. For example Muslims
do not eat pork. Therefore
Pork selling business in a Muslim community will not be viable.
Business persons should therefore assess peoples’ culture so as to get information
concerning the business opportunities that exist.
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6) Competitive environment
This is an environment where by firms are trying to outdo each other in their efforts to
maximize profits.
7) Physical Environment
The physical environment includes factors such as reliefs, climate and infrastructure like
roads, water supply, electricity, security and bank.
These factors may affect a business either positively or negatively.
For example good infrastructure will support business activities while poor infrastructure
may discourage business activities.
Exercise
1. Define external environment?
2. What is the other name of external environment?
3. List macro environmental factors.
4. Define culture?
5. Define business culture?
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