What are the external factors that cause businesses to decline or grow?

By Ezekiel Ahika3 min read · Posted Oct 26, 2023

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Almost every business begins with a vision to contribute to society through the production and sales of goods and services. The desire of every business owner is impact, growth, expansion, profit, and sustainable progress. No business plans to fail.

However, the US Bureau of Labor Statistics (BLS) reveals that about 20% of new businesses do not succeed within the first two years of establishment, while 45% of companies fail in the first five years, and in the long run, 65% fold-up in the first five years. But only 25% of new businesses succeed to 15 years and beyond.

Sustainable business success is achievable if we consider these essential external factors before and after starting a business.

Factors That Determine Business Growth and Decline

Here are six external factors which determine the growth or decline of a business:

  1. Customers' Preferences Businesses succeed when they can meet the flexible demands of consumers. Human wants are unlimited. Products and services we desire today may go out of season tomorrow.

Traditional theatres were once in business. Still, with the invention and proliferation of cinemas and digital transmissions, there was a decline in the patronage and profit margin in the theatre business.

Therefore, businesses must stay informed and ready to blend with the current preferences of customers to remain afloat in the dynamics of market variables.

  1. Culture and the society Culture plays a significant role in business growth. Society X may appreciate Product A but is devalued or seen as offensive in Society Y because of cultural differences.

Also, urban societies may quickly adopt new technological gadgets. But these same gadgets may face resistance when penetrating a rural market, and if accepted, the cost of production, marketing, and competitors' campaign may affect profit margin.

  1. Economic Paradigm Economic factors are often unstable. The rate of demand and supply changes. Inflation affects prices. When the prices of goods and services are higher than expected, people are less likely to spend on your business, and vice versa.

The wealth and poverty of people affect their purchasing power and choices. A buoyant economy reduces the cost of production, distribution, and prices. It is a fertile ground for business growth.

Also, some businesses thrive in certain seasons. For example, sales of Christmas trees, cards, and lights will yield high profits during the Christmas season. So, setting up your business to be relevant across various seasons of the year is helpful.

  1. Government Policies Tax policies, land use laws, foreign investment policies, exchange rates, consumer protection rights, political stability, and other governmental policies affect businesses.

In Nigeria, for instance, in 2018, the Lagos State Government enacted the Lagos State Transport Sector Reform Law, which banned commercial motorcycles. This policy affected the number of motorcycles that Nigerians imported. It also led to declining businesses like Max, Gokada, and Opay, which benefited from the industry.

Businesses that desire to thrive beyond 15 years of their establishment must conduct a pre-historic market survey. Studying the business site's past and present rules and regulations gives business owners a rich corpus of information on where they favor high-profit margins.

  1. Availability of Resources Most businesses fail because they need to envisage the futuristic scarcity of essential raw materials for their companies. Some resources are not infinite. They may have their seasons when they are available.

Natural and artificial factors may reduce resource availability, often leading to a decline in business. Agro businesses that depend on sunshine or rainfall may have a drop in production or sales during off-season periods.

So, before you begin your business, research where, when, and how the necessary financial, human, intellectual, physical, and natural resources will be available.

Suppose your business demands a high quantity of intellectual and human resources. In that case, you need to determine how to employ and sustain the availability and maximization of these resources to keep your business running.

  1. Competitors Competitors reduce profit margins and push many out of business. Some industries attract fierce competition because of their lucrativeness or ease of entry.

To stay strong in the face of competition, structure your brand to meet current demands, be the best in your niche, and have the best marketing strategy.

Conclusion

Business growth is dependent on all of these external factors. Your business can survive the competition, government policies, culture, seasons, economy, and whims of customers if you plan your strategies to recognize each factor.

References

Investopedia

Sahara Reporters

About The Author

Ezekiel Ahika

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I am Ezekiel Chidinma Ahika. I am a curious explorer, a researcher, a writer, and an editor. I have a Bachelor's degree in Education, English and Literature (B.A/Ed), and I am an Article Editor at Pitch Labs. I derive pleasure in writing educational content and teaching the things I know.

See more posts by Ezekiel Ahika

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