Definition and Types of Small Business External Environments
Small businesses don’t operate in a vacuum and changes within the external environment are business risks that can’t be ignored. A Small Business Owner can’t accurately forecast or control these external forces or events. However, you must be aware of what is happening within your external environment and determine if it has either positive or negative impact on your business. By understanding it, helps you to proactively take advantage of opportunities and minimize the threats. Long-term survival is only possible if you adapt your business processes and strategies to your external environment.
The Small Business External Environment can be defined as the events, forces, conditions and entities surrounding a small business that influence its activities, choices and decisions. The external environment can be broken down into two types i.e. the Macro Environment and Micro External Environment.
Macro Environment can be defined as the major external and uncontrollable factors that influence a small business’s decision making and affect its performance and strategies. The Macro Environment include the Political, Economic, Social, Technological, Environmental and Legal factors (PESTEL factors) affecting small businesses. Read blog post PESTEL/PESTLE Analysis for Small Businesses.
The Micro External Environment is the elements or factors within the small business’s immediate area of operations that affect its performance and decision-making independence. Examples of these factors include customers, suppliers, competitors, distribution channels and general public.The Macro Environment directly impacts small businesses, as well as indirectly, by affecting the Micro External Environment.
Macro Environment Political Factors
The Political Factors in the Macro Environment relate to how the government influences and intervenes in your small business environment. Small Business Owners need to be aware of and use federal, state and local government policies, programs and orders/actions to guide decision-making and setting direction.
Macro Environment Political Factors include:
- Government elections, term, political trends and probability of political change.
- Level of bureaucracy, regulation/deregulation and corruption of government.
- Federal and regional governments’ powers and policies, such as tax, economic, fiscal, health, agricultural and environmental policy.
- Transport, health, education and other infrastructure provided by government.
Small business funding grants and initiatives.
- Lobbying and pressure groups (farmers, miners, etc.)
- Goods and services that the government provides and does not want to provide.
- Public protection, conflicts, war and terrorism.
- Foreign and trade policies, tariffs, inter-country relationships and stability of foreign governments and overseas markets.
There is no doubt that this list of Macro Environment Political Factors impacts small businesses and that you need to adjustment to changes in the political landscape.
Macro Environment Economic Factors
The Macro Environment Economic Factors are related to the performance of the economy as a whole, that greatly affect how small businesses should operate and make decisions. The external economic environment also directly influences consumer optimism and the willingness to spend money. This possibly will affect the demand for your small business’s products or services and eventually your bottom line.
Numerous Macro Environment Economic factors can affect your small business, but the most likely ones are supply/demand, interest rates, inflation and unemployment. The Gross Domestic Product (GDP) is typically considered the most significant measure of the economy’s current health. Leading economic indicators are the stock market, manufacturing activity, inventory levels, building permits, housing market, level of new business startups, etc. Lagging economic indicators such as changes in the gross domestic product (GDP), income and wages, consumer price index (inflation), currency strength, interest rates, corporate profits, balance of trade etc. The indicators are economic data that help small business owners to be proactive by understanding the state/health of the economy and where we are going.
Examine the effects of these Macro Environment Economic Factors on your small business:
- National and local economy health, growth, development and trends.
- Industry health, growth, development and trends.
- Business/trade/economic cycle (economic stages are expansion, peak, contraction (recession & depression) and trough).
- Economic rates such as interest, inflation, taxation, unemployment, and international exchange rates.
- Demand/Supply and general price levels.
- Money and banking
Macro Environment Social Factors
The social environment consists of the society’s beliefs, behaviors, values, customs and practices, as well as the institutions with whom people interact.
Every society creates its own social environment and it differs across cultures. The Macro Social Environment can be a major factor in the success or failure of the business. Operating a small business within a multicultural society could make it more complicated to provide products/services that suit consumer’s lifestyles and needs. In addition, societal factors also influence the quality of the labor pool available to small businesses.
Analyzing the Social Factors within the Macro Environment will help small business owners to assess consumer needs and what compel them to buy.
Macro Environment Social Factors include:
- Demographics – Including population, age, race, ethnicity, gender, marital status, income level, education level, family size, employment, immigration, emigration, social classes and minorities.
- Cultural Aspects – Such as beliefs, values, ethical norms, language and traditions.
- Lifestyles – The way in which society lives including their interests, opinions, behaviors, habits, religion, leisure and purchasing patterns/trends.
- Attitudes – Attitudes towards careers, work ethic, safety, health consciousness, consumer protection, saving/investing, retirement, imported products, customer service, product quality, etc.
- Social Concerns – Concerns about safety, violence, social disorder, pollution levels, government corruption and more.
Macro Environment Technological Factors
Macro Environment Technological Factors affect operations, marketing and management of small businesses in three ways:
- Way of communicating internally and with target markets.
- Way of producing goods and services, and
- Way of distributing goods and services.
The available technology and/or change in technology can either make it easy or difficult to for a small business to enter/stay in the market, improve production output, or compete. Technological shifts affect production levels, costs, quality, outsourcing decisions that could increase profitability, lead to innovation and opening new doors (opportunities). In contrast, new technologies could also be a barrier or put your small business at a disadvantage if you cannot implement or afford it (threats).
Macro Environment Technological Factors include:
- Technology legislation, government expenditure on technology and technology incentives.
- Research and development (R &D) activity, innovation and automation.
- Communication networks, Internet connectivity, security and efficiency of computer systems (processor speed, memory and storage capacity).
- Consumers’ reaction to technological trends that benefits then (e.g. internet banking and shopping).
- Intellectual property issues.
Macro Environment Environmental Factors
Environmental factors include ecological and environmental aspects which affect how small businesses operate and the products/services they offer. Especially small businesses within industries such as tourism, farming, and insurance. The growing awareness of the current and potential impacts of environmental changes is both creating new markets and diminishing or destroying existing ones.
Macro Environment Environmental Factors include:
- Adverse weather (temperature, humidity, precipitation, cloudiness, visibility and wind), climate and climate change.
- Consumers Attitudes and Demands: Including ethics, morality, sustainability, “green” products, environment friendly business.
- Increasing scarcity of raw materials.
- Air and water pollution. Also pollution targets and laws.
- Recycling and waste management.
- Support for renewable energy.
Macro Environment Legal Factors
Small businesses face laws and regulations which determine what they can and cannot do. Laws are written statutes, passed by either the U.S. Congress or state legislatures. Regulations, on the other hand, are standards and rules adopted by administrative agencies that govern how laws will be enforced. Legislation changes and Small businesses owners must always ensure legal compliance.
Some laws that impact your small business include:
- Employment and Labor Laws: There are several federal and state employment and labor laws that regulates how businesses employ workers and independent contractors. These control minimum wages, working hours, overtime pay, employee benefits, welfare benefits, family/medical leave, equal opportunity employment, discrimination, harassment, work environment, workplace safety, safety equipment/clothing, workers trade unions, Non-US citizen workers, immigration, mandatory insurance, etc. Important laws for small business owners include the Fair Labor Standards Act (FLSA), Occupational Safety and Health Administration (OSHA) Act, Equal Employment Opportunity Commission (EEOC), Employee Retirement Income Security Act and Family and Medical Leave Act (FMLA).
- Tax Code: Most small businesses need to pay federal taxes, as well as, state taxes in state in which the business is registered. Small business owners need to know which business taxes to pay, how much to pay and when to pay them. Including income, excise, FICA taxes (for Social Security and Medicare), federal/state unemployment and federal/state workers compensation taxes. The Internal Revenue Code (IRC), Title 26 of the U.S. Code, covers all the relevant rules pertaining to income, gift, estate, sales, payroll and excise taxes.
- Advertising Laws: Advertising Laws aim to ensure fair and truthful advertising by regulating claims about products’ effectiveness and advertising practices to avoid misleading, deceiving, or cheating consumers. The Federal Trade Commission (FTC) requires that claims in advertising must be “evidence-based.” Other examples are labelling requirements and regulating the placement, timing and content of advertising. The main federal laws governing false advertising are the Federal Trade Commission (FTC) Act and the Lanham Act.
- Antitrust Laws: Antitrust laws are federal and state statutes to protect consumers from predatory business practices. These competition laws regulate the conduct and organization of businesses, making it illegal to compete in unfair ways. When a small business conspires with its competitors, third-party vendors, or other relevant parties, it may run into conflict with antitrust laws. Examples are conspiring to fix market prices, price discrimination and conspiring to boycott. The most important Antitrust laws are the Sherman Antitrust Act, Clayton Act and Federal Trade Commission Act.
- Privacy Laws: Privacy laws protects a person’s right to be left alone and regulate the collection, storage, and release of personal identifiable information such as financial, medical and other personal information. Small businesses with employees have sensitive personal information and must follow the regulations to protect personal information from disclose, unauthorized access, misuse or destruction. The employee’s private information includes Social Security number, driver’s license number, physical address, email address, health conditions, credit card, bank numbers or personal history Privacy Laws Include the Privacy Act of 1974, Privacy Protection Act of 1980, Health Insurance Portability and Accountability Act (HIPAA) and many other.
- Environmental Protection Laws: Environmental Protection Laws governs how people interact with their environment with the purpose to protect it and how people can use natural resources. Small business owners need to be aware that these laws regulate clean air, water quality, drinking water, resource conservation, pollution, chemical safety, waste management, contaminant cleanup and hunting and fishing The Environmental Protection Agency enforces these laws. Major federal environmental legislation includes, amongst others, the Clean Air Act (CAA), Clean Water Act (CWA), Safe Drinking Water Act (SDWA) and Resource Conservation and Recovery Act (RCRA).
- Licensing Requirements: To operate your small business legally, you’ll need to be properly licensed by the appropriate government agencies. Business licenses are permits issued by government agencies that allow individuals or companies to conduct business within the government’s geographical jurisdiction. These licenses are additional requirements beyond the registration of your small business. The licenses/permits you need depends on the nature of the business, the types of products and the location of the business. There are often many licenses, registrations and certifications required to conduct a business in a single location. The purposes of business licenses are for taxation, protect the public health/safety and validate the expertise of certain professionals.