What internal and external factors affect a business, and how do they influence its decisions?
The internal factors (finance, staffing/human resources, management and technology) and external factors (political, economic, social, technological, environmental and competitive) that affect business decisions, including which factors are controllable and which are not.
A focused answer to the SQA National 5 Business Management content on the factors affecting a business, covering internal factors (finance, staffing, management, technology) and the external PESTEC factors (political, economic, social, technological, environmental, competitive), and which are within the firm's control.
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What this dot point is asking
The SQA wants you to know the factors that affect a business and how each influences its decisions. Factors split into internal (inside the firm, largely controllable) and external (outside the firm, beyond its control), and the external ones are remembered with the acronym PESTEC.
Internal factors
Internal factors arise within the business and are usually within its control. If managed well they are a strength; if not, a weakness.
Because these factors are internal, the business can change them, for example by raising finance, training staff, improving management or buying new technology.
External factors: PESTEC
External factors come from the wider environment and are largely outside the firm's control. The business cannot stop them but must respond to them.
- Political. Laws, regulations and government policy, such as changes to the minimum wage, tax rates, health and safety law or trade rules. The business must obey them even though they raise costs.
- Economic. The state of the economy, including recession or growth, interest rates, inflation and unemployment. A recession cuts customer spending; higher interest rates raise borrowing costs.
- Social. Changes in society's tastes, fashion, lifestyle and population, such as growing demand for healthier or more ethical products. The business must adapt its products to match.
- Technological. New technology, such as automation, e-commerce and new equipment. It can improve production and open new markets, but makes older methods and products outdated.
- Environmental. The natural environment and pressure to be green, including extreme weather, the cost of energy and customer demand for sustainable, low-waste products.
- Competitive. The actions of rival firms, such as lower prices, new products or heavy advertising, which force the business to respond to keep its customers.
Controllable versus uncontrollable
The key distinction the SQA tests is control. Internal factors can be changed by the business, so it can act on its own weaknesses. External factors cannot be controlled, only responded to through planning, flexibility and good decisions. A well-run business monitors external factors closely and adapts quickly, for example launching greener products in response to social and environmental pressure, or cutting costs ahead of a recession.
Try this
Q1. Identify two internal factors that affect a business. [1 mark]
- Cue. Any two of: finance, staffing, management, technology.
Q2. Describe how a social factor could affect a fast-food restaurant. [2 marks]
- Cue. Growing demand for healthier eating; the restaurant must add healthier options or lose customers.
Q3. Explain one effect of a recession on a business. [2 marks]
- Cue. Customers have less to spend, so sales fall and the business may cut costs or lower prices.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA-style Describe4 marksDescribe external factors that could affect a business.Show worked answer →
Award 1 mark per external factor correctly described, up to 4 (the PESTEC factors). Political: changes in government laws and policy, such as a rise in the minimum wage or new safety rules, force the business to change how it operates (1). Economic: changes such as a recession, higher interest rates or rising unemployment reduce customer spending and raise costs (1). Social: changes in tastes, fashion and lifestyle, such as demand for healthier or greener products, change what customers buy (1). Technological: new technology can improve production and create new products, but also makes existing methods outdated (1). Environmental and competitive are also valid: weather and pressure to be green, and the actions of rival firms. Markers reward described factors that are clearly external.
SQA-style Explain4 marksExplain the effect that a rise in interest rates could have on a business.Show worked answer →
Award marks for explained effects (a cause and its consequence), up to 4. A rise in interest rates increases the cost of any loans or overdrafts the business has, so its repayments and costs go up and profit falls (1). It makes new borrowing more expensive, so the business may delay or cancel plans to expand or invest (1). Customers with loans and mortgages have less money to spend, so demand for the firm's products may fall and sales drop (1). However, if the business has savings, it may earn more interest on them (1). Markers reward the link between the higher rate and a clear consequence for costs, investment or sales.
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Sources & how we know this
- National 5 Business Management Course Specification — SQA (2024)