Internal & External Environmental Factors That Affect Your Business

There are shocking statistics around the number of businesses that fail. Some sources say as many as 90% don’t make it beyond a few years.

It shows that starting a business is hard work and many things can go wrong. There are many internal and external environmental factors that can impact your ability to become successful.

These factors are wide-reaching and can impact your entire operations and marketing strategy from email marketing to experiential marketing. If you’re not prepared, all the tactics and strategies in the world won’t help.

Furthermore, market competition and changing consumer preferences can pose challenges to a new business. It’s crucial to stay adaptable, and continuously innovate to meet evolving customer demands.

Financial difficulties and cash flow problems can hinder the growth, stability of your business. Proper financial management and planning are essential to navigate these hurdles successfully.

For instance, in the real estate sector, accurate and strategic financial planning can significantly enhance the ability to manage large-scale projects efficiently, ensuring that investments are sound and growth opportunities are maximized.

Regulatory compliance and legal obligations could present obstacles for entrepreneurs. Understanding and adhering to relevant laws and regulations is vital to avoid potential legal complications, and ensure a smooth operation.

In this guide, you’ll learn what the different types of internal and external environmental factors are and how they can impact your business.

Let’s dive in.

Why understanding internal and external factors matters

Have you ever seen companies that were considered by many to be too big to fail or to be in the perfect market? They got millions of dollars in funding, built a solid product, and were acquiring customers at a rapid clip but still failed?

Those failures didn’t happen in a bubble. There were many internal and external environmental factors that led to it. If the companies had identified the areas that would impact them on time, they may still be around today.

Let me give you a few examples.

In 2008, Lehman Brothers was a 158-year-old $600 billion financial institution that employed over 25,000 people around the world. It filed for bank bankruptcy due to being overextended in the subprime mortgage market.

Maybe it would have survived if it wasn’t so slow in identifying the external factors affecting its business model.

Juicero was a VC darling. It received over $100 million in funding from prominent firms like Google Ventures. The company made a $400 juicer that compressed the packs of juice sold by the company.

Source: https://techcrunch.com/2017/09/01/rip-juicero-the-400-venture-backed-juice-machine/

It claimed that only their machine produced enough pressure to squeeze the packs. That was proven incorrect by journalists from Bloomberg who made a video where they squeezed the juice by hand.

The company ceased operations and refunded customers soon after the journalists revealed this flaw.

While it may appear to be an external factor, it was internal. They had too many resources and didn’t apply their human capital efficiently.

The report by journalists was just the nail in the coffin.

What are internal environmental factors?

Internal environmental factors can be defined as the tangible and intangible factors that are under the direct control of the organization in question. Internal factors are further grouped as weaknesses and strengths. When you’re starting a business there are many internal factors that will be weaknesses but as you gain your legs, they can be transformed into strengths.

In broad terms, something that has a positive effect on the company’s brand, growth trajectory, revenue, etc. is considered a strength. If it has a negative effect on the company or doesn’t contribute to its growth then it’s considered a weakness.

An example of a positive internal environmental factor would be a marketing team that has all the resources to launch, evaluate, and optimize advertising campaigns to acquire new customers.

An example of a negative internal factor would be standard operating procedures that are inefficient or haven’t been updated in years.

The 11 types of internal environmental factors are:

1.     Shareholders and owners

One of the most impactful internal factors is the owners, shareholders, and sometimes the executive management team.

This group determines who gets hired and fired, the company culture, the financial position of the organization, and everything in between. It’s also difficult (and in some cases impossible) to change the owners, shareholders, or executive team.

If you’re a member of this group, it’s important to be introspective and deliberate with your policies and actions. If the wrong example is set, it can impact the organization for a long time to come.

Travis Kalanick, the founder of Uber, was ousted after the culture he created caused a number of scandals.

Darshan Somashekar, a serial entrepreneur who runs classic games and brain training startup Solitaired, explains that your management team is a critical factor for success.

“Companies are built from the top down. Your executive management team sets the culture and tone for everyone else in the company. If they can’t function well and make decisions together, it will have widespread negative effects across your company. It’s no coincidence that great companies have teams that can work effectively together.”

2.     Employees

Employees are the company. They’re the place ideas come from, the ones who execute plans, and handle emergencies as they happen.

When you have an organization that requires a large number of specialized employees, this internal environmental factor begins to be more noticeable.

Google and Mcdonald’s are both large corporations but the former needs thousands of highly skilled workers while the latter doesn’t.

If half of the workforce of each company quit tomorrow, McDonald’s would be able to bounce back faster because they utilize a lot of unskilled labor. The same can’t be said for Google.

To make the most of this intrinsic factor, it’s necessary to create a great place to work, constantly upskill your team, and have well-developed hiring processes based on HR metrics and analytics.

In aligning with strategic growth initiatives, leveraging salesforce consulting services can significantly optimize customer relationship management processes. Such services facilitate enhanced data analysis and customer insights, thereby enabling businesses to make informed decisions and tailor their strategies to meet specific market needs effectively.

Acknowledging the pivotal role of human capital is essential, as it significantly influences organizational growth and innovation. By investing in employee development, companies can harness the full potential of their workforce, driving success and maintaining a competitive edge in today’s rapidly evolving business landscape.

To elevate the discussion on navigating the intricate landscape of business influences, both internal and external, the implementation of a sophisticated HR Management System emerges as a cornerstone for modern organizational agility and strategic human resource optimization.

This sophisticated platform transcends traditional operational boundaries, offering a holistic view of employee engagement, performance metrics, and developmental opportunities. It acts as a catalyst for fostering a dynamic, engaging workplace culture, crucial for attracting and retaining top talent in a competitive landscape. Additionally, it equips businesses with the agility to swiftly respond to legislative changes and evolving market conditions, ensuring compliance and maintaining a pulse on shifting workforce expectations.

Through this advanced system, organizations unlock the potential to architect a resilient HR framework that is not only aligned with but also proactive in driving business strategy forward in the face of fluctuating environmental factors.”

Moreover, providing managers and employees with consolidated access to tools and information is imperative in complex organizations. An integrated HR platform centralizes essential HR functionality for a transparent employee lifecycle. Quality HR platforms promote autonomy by enabling self-service for basic administrative needs across devices.

Equipping people to handle basic tasks like time-off requests reduces bottlenecks while freeing HR staff to focus on more strategic initiatives. With the right configuration balancing automation with human interaction, cloud-based HR platforms tangibly improve experiences for managers, employees, and HR professionals alike. Optimized implementation of cloud-based HR technology maximizes efficiency gains over manual processes or disjointed legacy systems.

3.     Internal Processes

If a routine task is done differently by everyone then there may be an inconsistent end product.

When processes are documented – especially for repetitive tasks – it becomes easier to onboard new staff as well as newly hired freelancers and maintain product consistency. This can be for something as simple as cleaning the office in the evening or as complex as launching a marketing campaign.

When internal processes aren’t documented, it takes more time to execute plans and arrive at the end goal. If you’ve not done so already, start documenting every procedure in your organization – no matter how obvious it seems to be.

Moreover, adopt the culture of having meetings with your team. A team with good collaboration can bring exceptional results by discussing and communicating different challenges and finding the best possible solutions. 

To keep teams connected, businesses are using team chat or business messaging apps where teams can communicate seamlessly.

4.     Directors (board of directors)

In many organizations, the board of directors serves an oversight function and helps with a long-term strategy. They can also call the executive team to order if things go sideways.

In other organizations, the board of directors takes a more hands-on approach. They’ll help find candidates, make introductions, occupy limited positions within the company, etc.

Famous board members can also bring a sense of prestige to your organization that you may not otherwise have.

Whatever approach works for you is fine. Keep in mind that board members are often successful in their own right so don’t hesitate to lean on them when the time comes.

5.     Equipment

Equipment is one of the largest tangible assets organizations have/require. For some, it’s the way they do business like construction companies that rely on heavy equipment. They may lease a large amount of their equipment and manage their leases with the right lease management software because it’s expensive to buy outright or finance.

To effectively run a business, mastering the strategic deployment and maintenance of operational assets is crucial. In sectors like dining and hospitality, the condition and upkeep of kitchen equipment is critical for delivering consistent and high-quality services.

Skillful management of these assets enhances efficiency, cuts down on unnecessary expenses, and fosters both stability and expansion of the business. Adopting this method is vital for achieving enduring success and staying competitive within the industry.

For other organizations like KyLeads, our equipment requirements are negligible. All we need are laptops and we’re off to the races.

The way you manage the equipment you need can have a big impact on your cash flow and efficiency.

6.     Organization’s brand

The brand is an intangible asset that’s difficult to measure. That doesn’t mean it’s not important. Coke is one of the largest and most recognizable brands in the world and a large percentage of its valuation can be attributed to its brand.

Image source

The same can be said for a company like Nike. If you’re a smaller organization, you may feel like your brand is unimportant.

That’s not true.

It’s the steps you take when your brand is in its infancy that can have the largest impact. When it matters most, your brand will kick in and save the day (or lose the day).

That’s not to say you can’t correct course if there’s a mistake but it will set the tone for what’s to come.

To understand the impact of your brand, monitor mentions on social media, articles, forums, etc. and look at how branded search volume is trending. Ask people how they heard about you and what they think of your brand.

If it’s not in line with your goals, correct course.

In the dynamic world of brand development, it is essential to acknowledge that the evolution of your brand parallels the nurturing journey of a living organism. It requires unwavering dedication, meticulous refinement, and agile adaptation to the ever-evolving market dynamics.

Much like a tree thrives with the provision of optimal soil, adequate water, and ample sunlight, your brand flourishes in an environment enriched with nurturing care, a distinct voice, and consistent communication.

Furthermore, the essence of successful brand development transcends mere superficial appeal; it involves the holistic integration of your brand’s core into every facet of your operation.

7.     Company culture

Company culture is a term that’s hard to pin down but people intuitively understand. It encompasses your values but goes beyond them. You can think of it as the way people in your organization behave and handle certain situations.

For example, if a company turns the other way when people do insider trading, it will be seen as acceptable behavior. A culture will grow that accommodates and, eventually, encourages it.

Uber is a good example of what toxic culture can cause. The scandals that pushed the Founder out were a direct result of the culture that was fostered there.

In contrast, Zappos has a culture of service to its customers and it’s embodied in everything they do. It’s part of the reason why it was sold to Amazon for $1 billion.

A strong positive culture will help you grow your brand more quickly. A culture that’s not actively fostered may have a major negative impact on your business.

8.     Company finance

Finances are an intrinsic factor that many people are aware of. It determines the kind of investments you can make, who and how you can hire, the ability to launch marketing campaigns, and so on.

There are many avenues of finance for an organization. Some businesses take investor funding, others establish lines of credit, while others use their revenue to grow.

In internal environmental factors, securing the right financing options is pivotal in the business landscape.

Developing a bespoke financial blueprint is crucial for any business aiming to thrive and sustain its operations. A meticulous selection of the right financing strategy is essential, as it empowers organizations to efficiently allocate their resources, adeptly navigate risks, and seize opportunities within the marketplace.

This involves more than merely securing capital; it’s about finding an appropriate blend of financial avenues that resonate with the company’s goals and fiscal health. By adopting a strategic approach to finance, businesses can better steer through industry challenges and secure a prosperous future.

The range of financing options profoundly influences a business’s capacity for growth, resilience in economic turbulence, and ability to invest in new technologies or personnel.

Therefore, choosing the right financing strategy isn’t just about obtaining funds—it’s about aligning with partners and approaches that support your business’s goals and future growth.

However the financing is secured, it’s essential that there’s enough of it to launch initiatives that’ll help you hit your business goals.

You know, in this rapidly changing digital era, it’s not just about securing funds but also about how you manage and optimize them. I’ve seen businesses get a real edge by tapping into financial technology consulting services. It’s like having a tech-savvy friend guiding you through the maze of modern finance, helping you find smart tools and strategies.

Whether it’s about simplifying complex transactions or safeguarding your financial data, having that expert touch can make all the difference. It’s a bit like having a compass in the unpredictable world of business finance.

9.     Policies, procedures, and plans

These are separate but can be lumped together because they’re so closely related. The policies you adopt will serve as the framework for how people behave in specific situations.

For example, you may have a policy around email marketing that all emails should be friendly, insightful, and have a CTA.

While friendly and insightful communications strengthen relationships, lacking actionable next steps squanders opportunities to guide consumers along the purchase journey. Though building rapport and value stands imperative before having a CTA, delayed calls-to-action risk losing transient interest from target audiences.

Beyond setting foundational policies around tone and utility, brands facilitating frictionless responses through embedding CTAs translate engaged recipients into quantified conversions.

The procedure for creating the email would be:

1. Log into our email marketing service
2. Click create a new campaign
3. Create a subject line for the email
4. etc.

Plans would be the specific steps you take to get to a goal.

Your policies, procedures, and plans work hand in hand to achieve specific outcomes. Coupled with the owners and culture, these are some of the most important internal environmental factors that’ll impact your business’ success.

10.                        Intellectual property

Intellectual property (IP) is an important factor to consider and take advantage of. The largest companies in the world have countless pieces of IP and will go to court to protect it.

Many people have tried to steal IP and have succeeded through nefarious means. While this isn’t a conversation about how to enhance your digital privacy and security, it’s important to take it into consideration.

Additionally, having a business insurance policy in place can provide financial protection in the event of intellectual property theft. It’s also wise to periodically review and refresh your IP portfolio, ensuring every piece of your creative work remains shielded by the latest legal safeguards.

Furthermore, Workers’ Compensation Insurance is essential for businesses, as it covers medical expenses, rehabilitation costs, and lost wages for employees who get injured or ill at work, helping protect both the employees and the financial stability of the company.

Navigating the complex world of intellectual property (IP) requires more than just legal barriers; it demands strategic innovation management. Effective IP oversight involves not just defending against infringement through litigation but also proactively managing and updating IP assets to keep pace with technological advancements and market changes.

Employing advanced analytical tools can provide insightful data that enhances decision-making regarding IP development and protection strategies. Such comprehensive management ensures that intellectual assets are not only defended but are also leveraged to secure a company’s market position and drive future growth.

In addition, workers’ compensation insurance is necessary for businesses because it covers medical expenses, rehabilitation costs, and lost wages for employees who are injured or become ill on the job, helping to protect both the employees themselves and the financial stability of the company

Implementing state-of-the-art encryption for your digital treasures acts as a formidable barrier against prying eyes and illicit attempts at access.

I digress.

Google has a number of patents around search engine optimization. Organizations have created and patented methodologies that they use in their consulting practices. There are trademarks like Weight Watchers that only specific organizations can profit from.

The list goes on.

Your IP is a clear competitive advantage but no one will protect it but you. If you have IP that you haven’t taken the time to protect, do it now. You may be pleasantly surprised at how important (and profitable) it may become.

11.                        Technology developed in house

Technology has been a competitive advantage since man developed large-scale civilizations. Roman armies would invade nations and build roads to secure their supply lines. Banking empires were built using cutting-edge information dissemination techniques.

Technology developed in-house can take on a life of its own and become another revenue stream for you. Visme developed Respona and now sells it to customers. The digital agency 37Signals developed basecamp which eventually replaced the agency altogether.

Similarly, partnering with a reputable nearshore software development company can provide tailored solutions that propel your business forward.

What are external environmental factors?

External environmental factors can be defined as the tangible and intangible factors that are not under the direct control of an organization. For example, government policy is outside the control of most organizations.

External factors are important because even if all of your internal factors are moving smoothly, an external environmental factor can derail you in an instant.

In 2015, the Swiss Franc was unpegged against the Euro and many firms such as AlPari UK were made insolvent or lost hundreds of millions of dollars.

Not all eternal factors are created equally. They’re broadly categorized into micro and macro external environmental factors.

Micro external environmental factors

Micro external factors impact your industry or business directly but may not have an impact on the economy as a whole. Changes in micro factors can affect the day-to-day activities in your business and have an outsized impact on you.

An example of a microenvironmental factor is when government policy changes and you’re required to implement safety procedures for staff.

In light of recent global events, the emphasis on safety procedures for staff has become paramount for businesses. While some organizations had already established robust safety protocols, others found themselves scrambling to adapt to new regulations and guidelines.

It’s essential to understand that these safety procedures, though externally imposed, can significantly influence a company’s internal operations and staff morale.

Micro external environmental factors include:

Suppliers

Are your supplies meeting deadlines or are prices increasing over time? Those are factors that affect you alone and you may be able to rectify by switching suppliers or renegotiating terms.

Building strong and reliable connections with suppliers is key to business success, and developing a friendly and supportive rapport with them is vital. Based on the experiences of a company that installing safety lockers, it is evident that suppliers have a substantial influence on business activities.

For example, when this company struggled to obtain the appropriate components, it was their suppliers who stepped in and supplied the needed parts. Hence, nurturing a positive and encouraging relationship with suppliers is crucial for ongoing business prosperity.

Competitors

What are your competitors doing? Have they released new features that make your solution obsolete or have they been able to crack markets you’ve struggled with? It’s important to keep an eye on the competition without copying them wholesale.

Customers

What are your customers responding well too? Do they like your latest marketing campaign or was there backlash?

Audi posted an innocent-looking picture on social media that got tons of backlash recently.

People were upset for many reasons but it’s a learning experience for Audi. They couldn’t control the collective backlash but they can do better in the future. This is an external environmental factor that affected them alone.

Customer external factors also touch on demographics and psychographics. A few years ago, the Black Lives Matter movement wasn’t mainstream but now it’s capturing headlines the world over.

The same can be said for the Me-Too movement.

These are shifts in the attitudes of customers and if you’re insensitive to the current realities, it can turn into a PR disaster.

Certain government policy

Governments the world over make policies that affect specific industries all the time. For example, the finance industry is highly regulated.

Restaurants and healthcare facilities are also highly regulated. Car washes and retail clothing stores aren’t regulated nearly as much.

In the realm of regulation, one can observe the stark contrast between industries such as restaurants and healthcare facilities. While both grapple with substantial regulatory oversight, the healthcare sector faces an additional layer of complexity, primarily centered around achieving semantic interoperability in healthcare systems.

This intricate challenge necessitates the development and adherence to stringent standards and protocols to enable seamless data exchange among healthcare systems, safeguarding patient data accuracy and privacy. In contrast, sectors like car washes and retail clothing stores enjoy a comparatively lighter regulatory burden, allowing them to allocate resources to different operational priorities without the intricate interoperability concerns prevalent in healthcare.

It’s necessary to stay up to date with all the regulations that impact your business or you may find yourself on the wrong end of an audit. For example, if you want to start an LLC in Wisconsin, you’ll need to research the policies and guidelines.

Given the multifaceted regulatory landscape spanning various sectors, initiating an LLC in Texas requires a deep dive into the state-specific legal framework that governs business operations. This critical step ensures that entrepreneurs align their ventures with Texas’s unique blend of economic policies, tax regulations, and zoning laws, among others.

The imperative to navigate this complex terrain is underscored by the state’s vibrant and diverse economic ecosystem, which offers abundant opportunities alongside its regulatory demand.

“Government regulations can provide an incredible advantage—protecting lands from degradation, ensuring safe food sources, safeguarding biodiversity, and promoting environmental justice —all while supporting businesses in achieving their sustainability objectives. It is up to both businesses and governments to work together to find balance between economic growth and environmental protection.” – mentioned by Mark Wenger, founder of Mygov.me

Available talent

If the talent pool for your specific industry is narrow because of the size of your city or increased demand, this will have a big impact on how you do business.

You may have to pay well above the market rate to attract top talent. Conversely, if there’s a glut of workers, you can get great staff almost effortlessly. Another option is to consider using talent acquisition software that will help you find and hire the best talent.

Macro environmental factors

Macro environmental factors are more generalized and affect the economy as a whole. A change here will affect your industry and business and every other business or industry.

Like microenvironmental factors, it can force you to change the way you strategize, the way you do marketing, and even the kind of customers you work with.

Demographic shifts

The population you’re targeting may age and no longer be interested and the next generation needs a different type of marketing approach.

Your target audience may be emigrating out of the country. It may be that people as a whole no longer make as much money.

The demographic shifts that can affect your business are many and varied. Your job is to have a deep understanding of those changes and stay in front of them.

Societal changes

Gender stereotypes that were acceptable just 70 years ago, as seen in ads, may get a company sued today.

Society is constantly changing and there’s little you can do about it as an organization. Homosexual relationships were frowned upon 30 years ago but are accepted now.

Smoking was considered normal in the ’20s but now it’s taboo – you won’t even see it in the movies (only villains and Arabs smoke in Hollywood).

These are all societal changes that happen slowly then all at once. Stay abreast of them in a general sense so you won’t be blindsided.

Government policy

Like with microenvironmental factors, government policy can also have a large impact on every business. For example, the tax reform bill passed in 2018 cut corporate taxes and impacted every industry.

Things like environmental regulations, interest rates, etc. will affect you no matter what industry you’re in.

Large technological shifts

Industries that didn’t exist – that couldn’t exist – just twenty years ago are now some of the largest companies in the world.

• Uber
• Salesforce
• Snowflake (largest software IPO ever as of this writing)
• Slack

Technology has transformed the way we work, communicate, and spend money. Retail stores see a large percentage of their sales from their online shops. Project management has gone to the cloud.

The transformative power of technology continues to reshape the modern business landscape, altering not only how we work, communicate, and manage finances but also how we handle essential digital assets. As retail stores increasingly rely on their online shops to drive a significant portion of their sales, the need for a robust digital asset management platform becomes paramount.

These platforms empower businesses to efficiently organize, access, and distribute their rich media content, enhancing their online presence and customer engagement.

Simultaneously, in the realm of project management, the migration to cloud-based solutions has paved the way for seamless collaboration and remote work, aligning perfectly with the capabilities offered by innovative digital asset management platforms, which are essential tools for achieving business agility in the digital age.

These technological shifts can enhance your business but, at the same time, can leave you behind.

Note that social monitoring and tracking brand mentions is only possible when your brand has enough online presence and followers already. So if your brand is just starting out, prioritize channels like Instagram, Twitter, and LinkedIn. The more followers you have on social media, the more engagement you get, and that will in turn boost your brand’s visibility.

For instance, a brand with hundreds of thousands of followers shouldn’t have any problem with getting some Instagram likes and several reposts. Same thing applies to other platforms like LinkedIn and even non-social media channels, such as your blog.

If you wish to keep up with trends, if that’s really important to you, then your should understand that social media is hugely influencing any business’s standing in the market. That’s why you need the strongest presence and engagement on Instagram. In fact, this platform can be a game-changer for your business.

In today’s hyper-competitive business environment, staying relevant and responsive to changing trends is not just an option; it’s a strategic imperative. Social media’s pervasive influence on a business’s market position is undeniable.

This underscores the importance of cultivating a strong presence and engagement on Instagram. Instagram, as a dynamic platform, has the potential to be a true game-changer for your business.

By actively building a robust presence on this visual-centric platform, you aren’t merely following trends; you’re setting them. A dedicated and expanding Instagram following opens doors to a broader audience, allowing you to engage with diverse demographics and establish lasting connections. This shift towards fortifying your presence on Instagram isn’t just about keeping up with the times; it’s about positioning your business for sustained growth and adaptability in the evolving market.

By getting some Instagram likes, you can easily attract more potential clients and loyal followers, thereby broadening your TA. This is how you can enhance your brand image and increase sales. It’s all about customer trust and adapting to the external environmental changes to make your business competitive and relevant online.

Overall economic performance

There’s no way to sugarcoat this one. If the economy is depressed like what happened during the great recession in 2008 and now with COVID-19, everyone industry feels the pain.

These aren’t things you can foresee but they are things you can plan for.

In the face of an ever-shifting economic landscape, the necessity for robust business continuity consulting services has become a clarion call for organizations seeking to forge a path of resilience.

These specialized services, helmed by industry vanguards, transcend the realm of mere contingency planning, offering a holistic approach to risk mitigation and operational sustainability.

By meticulously analyzing an organization’s critical processes, supply chains, and interdependencies, these consultants craft bespoke strategies that fortify enterprises against the vagaries of market fluctuations, disruptive events, and unforeseen crises.

Armed with this proactive framework, businesses can confidently navigate turbulent waters, minimizing downtime, safeguarding revenue streams, and emerging as beacons of stability in an unpredictable world.

Focus on building a rainy day fund that’ll see your business through the good times and hard times.

Conclusion

There are countless factors that affect your business which are widely divided into internal and external. It’s important to understand how they can affect you and the steps you can take to mitigate your risk.

When done properly, you’ll be prepared for most situations – if not all.

Let me know the environmental factors that you’ve identified in your business and don’t forget to share.