No business entity exists in a vacuum and even global corporations have to face external factors that bear on their operations and profitability. These external factors can be defined as those factors that are beyond the purview of the company, yet affect the company directly or indirectly (Hoskisson et al., 2013). Whereas an entrepreneur cannot control the aforesaid factors, having an understanding of them can enable the avoidance of kindred adverse consequences. Further, an ability to predict external factors can enable a business to take advantage of them and garner profits from the same. Similarly, external factors affect stocks, bonds, mutual funds hence money managers must take careful cognizance of them. Albeit external, these factors have major internal implications and cannot be taken for granted.
Effects of Economic Environment
In the year 2008, there was a market crash in the US financing market caused by careless investing, mainly in the mortgage business. This caused a general economic downturn in the USA that spread around the world. Motor vehicle manufacturers rely on financing for most of their sales and with the crippling of financing companies, even the best motor vehicle marketers got hit hard, with many going under (Shelburne, 2010). This is a prime example of how the external economic environment can affect a company from an external perspective yet have major internal ramifications. Economic factors mainly take the shape of a boom and bust cycle. A boom is a moment when the economy is bullish, a lot of money is available in the market hence the availability of high profits to be made. The 2008 financial crisis is an example of a bust when the economy is low and there is little if any money in the market to trade. Normally, booms and busts occur consecutively and understanding when one ends and another begins is integral to good entrepreneurship. A boom or bust in one market can affect another market based on the interdependence of the two markets (Teall, 2013). For example, America is one of the largest coffee markets yet most of the coffee comes from third world countries such as Brazil. An economic boom in Brazil will increase coffee prices because farmers have a stronger negotiating position. This external factor will affect the coffee market in America through increased prices.
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Social and Political Climates
America is home to some of the largest global corporations, a good example being beverage giant Coca-Cola . When the war on terror began, many Islamic countries felt that America was victimizing the Muslim communities (Vasagar & Henley, 2003). Several religious leaders in the Islamic world preached against American products in general, mainly singling out Coca-Cola products. With there being over a billion Muslims in the world, this social spat cost Coca-Cola billions of dollars in different parts of the world over a period of several years. The market is made up of humans and human beings are social beings. Social perspectives will, therefore, always affect markets and by extension companies both from a local and international perspective (Teall, 2013). In this day and age of social media, a seemingly simple social issues such as religion, gender or race can have a crippling effect on a company. Another critical external issue is political factors. A good example is crude-oil, which directly or indirectly affects all markets. If there is even a whiff of unrest in the Middle East, oil prices skyrocket, affecting almost all prices suddenly thus having a major impact on all businesses.
Interest Rates and Inflation
Interest rates are policy driven external factors that affect almost all businesses because sales volumes are directly reliant on liquidity. In the USA for example, interest rates are set by the Central Bank and the Federal Reserve Bank with alterations being made eight times annually. Interest rates directly affect inflation on a cause and effect basis. When inflation is too high, interest rates will be reduced, increasing liquidity and a possible market boom (MarksJarvis, 2017). This increases commerce and by extension profits. If liquidity is too high, interest rates will be increased. This increases inflation through reduction of liquidity. Purchasing power is diminished so is the ability to make profits. In 2017, interest rates in America have been raised several times. This has had major adverse ramifications on the mortgage market yet without any major impact on the motor vehicles market (MarksJarvis, 2017). An understanding of this dynamics can enable and entrepreneur makes sound investment decisions.
Bonds versus Stocks
Bonds and stocks are both means that a company uses to gain necessary capital but the two are exponentially different. Bonds are debts loaned to a company by individuals or entities, the same being payable at an interest (Teall, 2013). Stocks in the other part are units of ownership in a company issued at a given price. In the case of external factor interferences, stockholders and bondholders are affected differently. For example, if two individuals have invested in stocks and bonds respectively in a military company, perhaps a war can break out creating massive profits for the company. The stocks holder will see a massive appreciation of the investment made due to the increased value of the stock but the bondholder is only entitled to the investment and a preset interest against it (Teall, 2013). However, in the case of a bust and the company’s fortunes plummeted, the bondholder would still be entitled to the investment and interest but the stockholder might lose part or all of the investment. Therefore, when a company is issuing an IPO, investors will seek to predict the fortunes of the company, based not only on the internal factors as advertised by the company but also external factors kindred to the nature of the company. A company that deals in alternative energy, for example, may have more solid prospects than another dealing with coal-based not in the internal environment of the companies but the external political/social issue of global warming.
References
Hoskisson, R. E., Wright, M., Filatotchev, I., & Peng, M. W. (2013). Emerging multinationals from mid ‐ range economies: The influence of institutions and factor markets. Journal of Management Studies , 50 (7), 1295-1321
MarksJarvis, G. (2017, March 17). What the Fed's interest rate increase means for you: 6 things to know . Retrieved September 22, 2017, from http://www.chicagotribune.com/business/ct-fed-interest-rate-impact-0316-biz-20170315-story.html
Shelburne, R. (2010). The Global Financial Crisis and Its Impact on Trade: The World and the European Emerging Economies (No. 2010_2). UNECE
Teall, J. L. (2013). Financial trading and investing . Amsterdam: Elsevier.
Vasagar, J., & Henley, J. (2003, January 08). Think Muslim, drink Muslim, says new rival to Coke . Retrieved September 22, 2017, from https://www.theguardian.com/media/2003/jan/08/marketingandpr.internationalnews
