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Classifying internal and external factors

You know the two lists, but a case fact leaves you unsure which list it belongs to.

An internal factor is something the business can change directly. An external factor is something outside the business that it can only respond to. The control test sorts any fact in a case into one of the two.

This lesson opens the business environment cluster. Next comes explaining technology and market changes.

What is the control test?

Take a fact from the case and ask one question: “Can the owner change this directly?” If yes, it is internal. If no, it is external.

The test works because the two lists are really about control, not about topics. The same topic, such as money, can appear in both lists.

Worked example: an invented bakery

Kedai Roti Mawar is a small bakery in a fictional town. Here are seven facts from its case. Apply the test to each.

Fact Can the owner change it directly? Label
The two bakers have five years of experience Yes, through hiring and training Internal
The oven is old and slow Yes, by repairing or replacing it Internal
Flour prices have risen by RM1 a bag No, the supplier sets the price External
A new bakery opened across the road No External
Customers now prefer wholemeal bread No, but the bakery can respond External
The owner has RM5 000 in savings for the business Yes, she decides how to use it Internal
A new rule requires staff to wear hairnets No, it applies from outside External

Notice the money rows. Flour price is external money, while the owner’s savings are internal money.

The mistake of labelling by topic

The common slip is to label by topic: “money is internal”, “customers are external”. This breaks on cases, because the topic does not decide the label.

Compare two answers to the question “Classify the rise in flour prices”. The generic answer says: “It is a finance factor.” The applied answer says: “It is external, because the supplier, not Kedai Roti Mawar, sets the price, and it raises the bakery’s costs.”

Check yourself

In the bakery case, classify each and give the reason in one phrase: (a) the owner decides to stay open one hour later, (b) a bus route to the town centre is cancelled, (c) the bakers lack training in making sourdough.

Answer

(a) Internal: the owner decides opening hours directly. (b) External: the bakery has no control over bus routes, although it may lose customers. (c) Internal: the owner can arrange training.

If you labelled (b) internal because it “affects the shop”, revisit the test: affecting the business is not the same as being controlled by it.

What to study next

After classifying, the next step is to say how an outside change works through to the business. Continue with explaining technology and market changes, and then combine both skills in applying a simple environment analysis to a case.

The business case answer planner sets out the steps for a case question. For a teacher to give you fresh cases, see online one-to-one Business tuition.

Common questions

What is the difference between internal and external factors?

Internal factors sit inside the business and the owner can change them directly, such as staff skills or equipment. External factors sit outside and the owner cannot control them, such as competitors, prices set by suppliers or new rules.

Is the owner's decision to raise prices internal or external?

The decision is internal because the owner controls it. The reason for it may be external, such as a rise in flour costs. In a case answer, name the cause as external and the response as internal.

Where do customers belong?

Customers and their tastes are external, because the business cannot control what people want. How well the business serves them, for example by training staff, is internal.

Do I need to memorise lists of factors?

A short list helps, but the control test works on facts you have never seen. Ask whether the business can change the factor directly, and the answer tells you where it belongs.

If you still hesitate over which list a case fact belongs to, a one-to-one Business teacher can give you fresh facts and hear how you decide.

  • Online one-to-one lessons for your child with an experienced teacher.
  • Your first class is a one-hour trial, from RM50. The fee is agreed before you book.
  • Happy with the teacher? Continue with lessons of about 1.5 hours. If not, ask for another teacher.