A business can either be affected by internal or external environmental factors. Internal elements affect the business from within and can be easily handled by the management. Examples of three internal environmental influences are the organization’s structure, the firm’s culture, and availability of resources. For example, if the organizational structure doesn’t give freedom to workers to do some things by themselves, it can negatively impact productivity. On the other hand, supportive office culture can motivate employees. A firm needs both financial and technological resources to produce quality goods and services.

The external business environment includes all factors that affect the firm from outside. These elements cannot be easily managed because they are beyond the firm’s control. The three external environmental factors that affect the firm include competitors, customers, and suppliers.

A firm will always face competition if the venture is profitable. The best way to deal with competition is to keep an eye on them. For example, if a competitor firm introduces a new product, the company should also launch an improved version of their item. On the other hand, customers will always change their tastes, and it’s up to the firm to keep up with those changes. Suppliers provide the business with inputs for production. If the market price for raw materials rises, the supplier will shift that cost to the business. When dealing with external environmental factors, businesses have to adapt to the changes to survive.

There are a large number of external environmental influences that can impact a business. Anything that is exterior to the organization itself but that affects the way the business is run or how much it can earn is an external influence.

One such influence is the government. Governments will pass bills and rulings that govern how a business can operate. In some cases, they are positive, such as anti-monopoly laws that help smaller businesses from getting pushed out of the market; in other cases, such as regulations on foreign trade, they can put a toll on the company.

Another external influence is competition. Competing companies will drive prices and customers and will force the company to make adjustments. Competition is typically good for the consumer, but it can be difficult for a business to endure and overcome.

A third environmental factor is external innovation. Unrelated organizations or individuals can disrupt the marketplace by innovating on products or on the method of delivery of those products. For instance, the advent of cheaper energy alternatives will likely disrupt the railroad industry, because flights will become cheaper and therefore a better option than relatively short-range commuter trains.

An organization's external environment is defined as anything outside of the actual boundaries of the organization that can influence the organization.

Competition is one external environmental factor. Competition refers to any industries that sell either similar or identical products and services, but competition can be limited to specific "geographic locations and markets" (Ashim Gupta, ed., "Organization's External Environment," Practical Management). While competition can seem scary, it can actually lead to more growth and development. When competitors start offering products and services that are similar to another company's, it forces the company to think outside of the box. The company is now forced to think innovatively in order to make its own products and services stand out from the competitors' or to figure out how to offer something brand new that competitors have not yet thought of. Competition can also force companies to enhance the quality of their service in order to outshine the competition.

However, competition can be harmful if a company is indeed completely outshined by the competitor. Studies show that when low-performing students are paired with high-performing students, the low-performing students start doing even worse than before or even completely quit. The reason why is that they see themselves as being unable to ever match their partners, so they completely give up. The only way for one partner's work to enhance the work of another partner is if partners equal in skill level are matched up (Annie Murphy Paul, "Can Tough Competition Hinder Academic Performance?," Time). The same can be seen as being true in the business world. If a company is totally eclipsed by its competitor, the company will fail. But if the competitor is equal in status and skill level, the two competitors will enhance each other.

Customers are a second external environmental factor that can both positively and negatively influence a business. The term customer refers to any person who purchases and uses a company's products and services. Customers can become an area of concern because their opinions change very frequently and very suddenly. Customers can also change demographically, which includes changes in "population age, ethnicity, education level and economic class" (Ashim Gupta, ed.). The more customers change, the more a company's products and services also have to change to reflect the new growing demands. Hence, as with competition, if a company is able to innovate and change with the changing demands of customers, then the business will grow and prosper. But if the company is unable to change, then changes in customer satisfaction will lead to business failure.