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.
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.
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, 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.”
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.
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 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.
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 because it’s expensive to buy outright or finance.
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.
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.
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.
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.
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.
The procedure for creating the email would be:
- Log into our email marketing service
- Click create a new campaign
- Create a subject line for the email
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.
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.
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.
Micro external environmental factors include:
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.
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.
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.
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.
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.
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.
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.
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.
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.
- Snowflake (largest software IPO ever as of this writing)
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.
These technological shifts can enhance your business but, at the same time, can leave you behind.
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. Focus on building a rainy day fund that’ll see your business through the good times and hard times.
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.