1.7.1 - External influences on business decisions

Social changes and customer needs

Social influences arise from changes in people, their lifestyles and their attitudes.

Population age, household patterns, working habits and attitudes towards health can change demand. In an illustrative town, more residents work late shifts. A café might offer evening meals rather than close in the afternoon. The change creates an opportunity because the opening hours now match a customer's need; it also raises staffing and lighting costs. The café should check whether additional sales justify those costs.

A change in attitudes towards healthier eating could increase demand for lower-sugar products. A food producer might alter recipes, packaging or its product range. It needs evidence about its target customers: some customers may value taste or low price more than the new feature. Treating a broad trend as the preference of every individual risks producing unwanted goods.

Social influences can also affect the workforce. A desire for flexible working may lead a business to offer different shift patterns to attract staff. This may help recruitment, but the schedules must still cover customer demand. The response is a business decision; the wider change in expectations is the external influence.

Technology and business choices

Technological developments can change both how a business operates and what customers expect it to offer.

Improved production equipment may make output faster or more consistent. Digital stock systems can help a retailer detect low inventory before it runs out. Online ordering can let customers buy without visiting a branch, widening the market and changing expectations about convenience. Technology is an opportunity when it solves a real problem, rather than simply because it is new.

In an illustrative business scenario, a small pharmacy considers online repeat-order requests. Customers might find ordering more convenient and staff might spend less time recording requests by telephone. The business would still need a reliable system, suitable staff training and protection of customer information. Set-up costs and disruption can be significant for a small firm. A large chain might spread development costs across many branches, but a system failure could affect a much larger number of customers.

Technology can increase competition: customers can compare prices online, and sellers from further away may enter a firm's market. Existing products can also become obsolete when a new technology meets the same need better. A business may therefore choose to invest, retrain staff, change products or retain a personal service that its customers value. It should compare benefits with investment, maintenance, reliability and security risks.

Environmental pressures and responses

Environmental influences include physical conditions and concerns about the effects of business activity on the natural world.

Flooding or water shortages can interrupt production, damage stock or disrupt suppliers. A business may change its location, hold a reserve of essential inputs or seek alternative suppliers. These decisions cost money but can reduce the risk of losing output. An environmental event outside the firm is distinct from its internal decision to protect itself.

Concern about waste, pollution and resource use can also influence customers and investors. A clothing retailer might offer longer-lasting products or reduce packaging to appeal to customers who value lower waste. Some investors may prefer firms that manage environmental risks because fines, disruption or reputational harm can threaten future returns. Other customers may be unwilling to pay a higher price, so demand cannot be assumed.

In an illustrative business scenario, a drink producer replaces a difficult-to-recycle bottle with a recyclable container. This may attract customers concerned about packaging waste, but purchasing new containers and adapting equipment may raise costs. It should examine the actual environmental effect and the customer's response. Calling a product “green” without evidence can damage trust.

Environmental influences can overlap with social or political ones. Concern about waste is an environmental issue expressed through customer attitudes; a government packaging rule is also a political/legal influence. An explanation should identify the mechanism rather than force every event into only one category.

Political decisions and uncertainty

Political influences arise from government decisions and the stability of the political environment.

Changes in tax, spending priorities, legislation or trade policy can change costs and market access. In an illustrative country, a proposed safety rule would require additional testing of toys. A toy producer might budget for testing, change its materials or delay an expansion until the final requirement is known. The proposal is not yet the same as an enacted rule; the firm should plan for possibilities without claiming that the obligation already applies.

Political instability can make delivery, investment or long-term planning more uncertain. A multinational considering a new factory may be concerned that transport routes will close or policy will change unpredictably. It may demand a higher expected return for taking the risk, delay the investment or choose another location. A local business cannot necessarily leave, so it may focus on alternative supply routes and cash reserves.

Some changes offer opportunities, such as improved infrastructure or easier access to another market. A firm should compare both the opportunity and the implementation cost. A business goal such as growth remains its own objective; a government's decision is an influence on how feasible that goal is.

A sensible response begins with evidence about what has changed, which customers or operations it affects, and how soon. It then compares feasible actions against the firm's resources and objectives. The largest firm and the smallest firm need not respond in the same way to the same external influence.