Definition: External factors are elements that influence a business’ results and performance from the outside. These factors are often part of the economic, political and social environment of the locations where the company operates.
What Does External Factor Mean?
A company’s performance can be affected by both internal and external influences. The internal ones are regularly associated with corporate governance, organizational structure, marketing decisions, financial healthiness or product design. These variables shape a business from within.
Nevertheless, there are other elements that affect the business from the outside, which is the case of macroeconomic variables such as inflation, interest rates and currency value, or political ones, as is the case for new legislations affecting entire industries or free trade agreements with other countries.
On the other hand, the social and cultural environment can also influence a company externally. Certain traditions and habits can affect customer’s decisions in regard to product selection or consumption and also, social unrest can also affect the way businesses develop over time. In order to tackle these issues, companies frequently develop strategic plans to anticipate the effects of external factors in the business’ performance.
Example
GrandMa Nachos is a Mexican company that produces ready-to-eat corn-based food. The company’s major customer base is based in Mexico but they are looking to expand to the U.S. market. In order to do so they need to evaluate how currency exchange rates will affect the price of its products to understand how competitive they are. For that reason the company hired an external consultant to design an expansion plan.
This plan includes an assessment of the external factors that will affect the business when it starts reaching U.S. customers and among these elements the consultant identified, apart from the currency exchange rate variable, a customer preference shift towards organic products and also an increasing risk of new customs regulations that will adversely affect products that are imported from Mexico.
