A business firm is an open system. It gets resources from the environment and supplies its goods and services to the environment. There are different levels of environmental forces. Some are close and internal forces whereas others are external forces. External forces may be related to national level, regional level or international level. These environmental forces provide opportunities or threats to the business community. Every business organization tries to grasp the available opportunities and face the threats that emerge from the business environment.
Business organizations cannot change the external environment but they just react. They change their internal business components (internal environment) to grasp the external opportunities and face the external environmental threats. It is, therefore, very important to analyze business environment to survive and to get success for a business in its industry. It is, therefore, a vital role of managers to analyze business environment so that they could pursue effective business strategy.
A business firm gets human resources, capital, technology, information, energy, and raw materials from society. It follows government rules and regulations, social norms and cultural values, regional treaty and global alignment, economic rules and tax policies of the government. Thus, a business organization is a dynamic entity because it operates in a dynamic business environment.
System Approach of Business Environment
All the systems are subsystems of other system in the nature except the supra-system or cosmos. We individually are also the part of our family. Formal organization or business is made of group of people for specific purpose. Very similar to the organization we personally are the members of our family and that is a component of a broader society. The same society is a component of a nation. Group of nation with similar interest are grouped in regional alliances such as SAARC and EU. World economy is made of with all these regional alliances and network.
In this approach, nothing is in isolation. All are integrated and interlinked. Organizations are open systems because they get resources from others and give output to others. A business deals with number of business kenvironmental forces. These forces from where a business gets resources and supplies resources, forces that influence the business operation, and factor that present opportunities and threats are taken as the business environment. In this sense, a business can be viewed as an internal system or controllable system of a manager or strategist. Managers can control their own businesses. Managers can collect resources such as capital, human, information, idea, land, and equipments. These components are controllable. Managers can operate their organization and use their decision to run it. Similarly, the output of the organization is also under their control. But, other broader systems that cover the business may not controllable.
Group of similar organization becomes an industrial system that comprises business organizations as its subsystems. Industry level environment is common to all the businesses running within the industry. A country and its environment is broader system that covers even the different sectors or industries such as banking, education, health, trade, manufacturing, and service industries. Therefore, it affects all the business operations inside the nation. Regional alliances influence the national policy because a country is a subsystem of the regional alliances such as SAARC and BIMSTEC. Even such regional alliances are also affected by the broader international systems such as WTO and United Nations. Relatively broader systems are uncontrollable for any subsystems. In case of a business, it is a very small subsystem that should follow the industry norms, national policies, regional agreements, and global systems.
In summary, it can be concluded that a business and its internal areas are controllable for a manager but other broader systems control the businesses. Therefore, the strategy for a manager is to control internal areas and react with the external forces to grasp the opportunity and face the threats presented by the external environment. This system approach can be classified into three environmental groups: uncontrollable, semi-controllable, and controllable that is further detailed in the following section.
Components of Business Environment
A manager must follow a change in his or her structure, strategy and policies in response to the changing environmental forces. Thus, a business firm exists in two level of business environment a) Internal and b) External. Internal business environment comprises internal structure, system, culture, staff, and resources of the organization. This is sometimes identified into the internal functional areas such as marketing-distribution, finance accounting, human resources, production-operation, and research-development. All these business environment components are controllable.
External business environment comprises two layers that are task business environment and general business environment. Task environment is also known as close or industry level business environment. Such environment more directly interacts with the business operation and semi-controllable in nature. Next layer is relatively broader and more indirect in nature that covers the effect of environment emerged at national, regional, and international level. Therefore, the business environment figure is presented in three layers.
Business environment comprises internal components of a business, which is manageable at managerial level. Internal business environmental forces are the components of the business. As discussed before semi-controllable and uncontrollable environmental forces are external business environmental forces. These forces can be classified into two levels: industry level and general level. These general environmental forces may exist at national, regional and international level. The internal environment or business components are surrounded by industry level environment and the industry level business environment is surrounded by general level business environment.
Various Approaches of Identifying and Reporting Environment Components
There are many distinct but similar approaches available in categorizing business environment components. Jauch & Glueck (1988) identified business environment components into three sets namely general, industry level, and internal. This concept became very popular and holistic among the many academicians. They identified five major components including political-legal, socio-cultural, economic, technological, and climatic factors of general business environment. Industrial and general level business environment are grouped into external business environment.
Many writers coined Political, Socio-cultural, Economic, and Technological factors as PEST. 1 Political and legal components are sometimes separated and PESTEL is also used as an acronym. Some others address these external environment components as Social, Technological, Political, and Economic (STEP) factors. Including natural environmental factors into this set social, technological, economic, environmental and political (STEEP) model is presented. The same natural environment is also taken as a distinct component; therefore, it is sometimes addressed as Socio-cultural, political- legal, Economic, Natural, and Technological (SPENT). 2 Cartwright identified an acronym SPECTACLES to address the set of ten external environment components such as Social, Political, Economic, Cultural, Technological, Aesthetic, Customer, Legal, Environmental, and Sectoral. 3
External business environment are grouped into remote environment for general and operating environment for task or industry level business environment. 4 General business environment is also used as macro- environment. Similarly the industry level environment is used as the micro- environment in many writings. 5 Furthermore, industry level business environment is also taken as competitive environment. 6 Some writers even merged competitive environment into a set of external or general environment. 7
General Business Environment Components
A variety of factors can affect company's business. Such factors can be national level, regional level, and international level environmental forces.
1 see Johnson & Scholas, 2003. 2 e.g. Campbell, Stonehouse, and Houston, 2002 p.118, Pettinger, 1996 3 Cartwright, R. (2002). Mastering the Business Environment. London: Palgrave Macmillan. 4 see Pearce & Robinson, 1998, p 99 5 Campbell, Stonehouse, and Houston, 2002; Haberberg & Rieple, 2001 6 e.g. Dobson, Starkey, and Richard, 2004, p. 19; Miller, 1998, p. 76. 7 see David, 2003, p. 94 These factors are also known as societal factors or macro level business environment factors. In general, five forces are taken as the general environmental factors namely economic, socio-cultural, political-legal, technological, and international. Some writers included natural environment as a distinct component but the growing social awareness on natural environment shows that this component can be included into the socio-cultural environment.
Set of these environmental factors is mostly referred by first four factors PEST (Political-legal, Economic, Socio-cultural, and Technological). The logic behind this is pervasiveness of the international environment because it affects all these four sectors. Fast growing technological development, outsourcing business, emergences of multinational companies, and global and regional alliances have made the world a global village. In this context, effect of international environment in four major components of general environmental factors is natural. In today's dynamic business environment Information Communication Technology (ICT) revolution and globalization are to be considered very important effect in today's international business environment.
Growing multinational companies and their influence in one national economy is clearly evident. Use of automated technology and e-commerce has replaced many of the manual works and workplace. World Trade Organization and its growing members including Nepalese 147 th membership in Cancun summit has placed new opportunities and threats to the developing countries like Nepal. South Asian Association for Regional Cooperation (SAARC) is active since twenty years and it recently declared South Asian Free Trade Area (SAFTA) charter. Furthermore, Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and its future potentialities presented new prospectus to the local and international business entities in this sector.