MPANDE, D

BUSINESS ENVIRONMENT
CHAPTER ONE
UNIT 1
INTRODUCTION TO BUSINESS ENVIRONMENT
According to different scholars, business environment refers to those aspects of the
surroundings of business enterprise that affect or influence its operations and determine its
effectiveness. More specifically, Keith Davis defines business environment as, "the aggregate of
all conditions, events and influences that surrounds and affects it”.

Business Environment presents threats as well as opportunities for any business. A good
business manager not only identifies and evaluates the environment but also reacts to these
external forces. The importance of the business environment can be neatly understood if we
consider the following facts:

i. It enables us to Identify business opportunities. All changes are not negative. If

you understand and evaluate them, you will see that they can be the reason for the
success of a business. It is very necessary to identify a change and use it as a tool to
solve the problems of the business.

ii. It helps in tapping useful resources. Scanning allows firms to track or locate
resources and change them to goods and services.

iii. It allows us to cope with changes. If the business is aware of changes that occur
regularly then it can bring about a response to deal with those changes.

iv. It provides us with assistance in planning.

v. It helps us in improving performance. Adapting to the external forces helps the

business to improve its performance and survive in the market.

Objectives of Business Environment

1. Knowledge of Information: Every businessman should be aware of the

ability of the current environment of the business to change accordingly.

2. Basis of Decision: It contains all the information which is needed for

taking good decision.

3. Helpful in making of policies: To make good business policies, one needs

to know and scan the business through the business environment.
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4. Technological Planning: In today's environment, it is very important for

the business houses to keep themselves changing according to technological
changes in the market.

5. Survival in the business: Sometimes the industry may face a recession. In

such a condition, only those businesses that estimate this entire situation in
advance through a business environment study will survive.

1.1. Definitions and characteristics of business

Anshen defines business as “the way by which men make their living”. In this course we define
business as a human activity that is carried out by the unified efforts of different categories of
people with the aim to produce wealth through production and distribution of desired goods
and services.

1.2. Characteristics of Business

As we have studied earlier, business is a regular process of producing, purchasing and selling of
goods, with the main objective of earning profit and acquiring wealth through the satisfaction
of human wants. Business has many characteristics however the essential ones are as follows:

1. The sale, transfer or exchange activities for the satisfaction of human

wants

2. The dealing in goods and services such as supplying of water, electricity

or repairing of cars, TVs or mobile phones

3. The regularity of dealings. Thus, if an owner of a motor car sells his car,
it does not constitute business in the real sense.

4. The distinguishing feature of business is the profit motive behind the

activities.

5. Finally, undertaking risk is the inherent characteristic of business

enterprise.

1.3. Environmental scanning and tools for environmental scanning: SWOT, Pestle

We can define environmental scanning as the process of gathering, analyzing and dispensing
information for tactical or strategic purposes. This process requires taking both subjective and
factual knowledge about the business environment where a company operates or considers
entering.

Organization decipher and learn from their environment by first scanning (information
seeking), followed by interpretation (giving meaning to the collected data) and finally learning
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(taking action based on the data) (Daft and Weick., 1984). Scanning according to Lester and
Waters (2004) is a management process that uses the information from the environment to help
with decision-making, keeping in mind that the environment is under rapid change and can
greatly impact the business firm, you will begin to appreciate the importance of environmental
scanning. Friday, (2006) highlights the importance of environmental scanning as follows:

• All environment tend to be dynamic by nature, therefore scanning is necessary

to keep abreast of change.

• Scanning reveals the elements or factors that constitute threats and opportunity
to the overall objectives of the organization.

• Scanning allows organizations to monitor and put appropriate strategies in place

to check market incursion.

• Scanning provides the necessary input to the formulation and implementation of

potent marketing strategies.

Environmental scanning has different kinds of scanning namely;

1. Ad-hoc scanning which involves short term, infrequent examinations and

is usually initiated by a crisis

2. Regular scanning which involves performing studies on a regular

schedule (e.g. once a year)

3. Continuous scanning (also called continuous learning) which involves

continuous structured data collection and processing on a broad range of
environmental factors.

The basic purpose of environmental scanning is to help management to determine the future
direction of the organization.

1.3.1. Tools of environmental scanning; SWOT, PESTLE

A PESTEL framework can be used to analyze and monitor the macro-environmental factors
that may have a profound impact on an organization's performance. It is useful at the beginning
of a new business. It is mostly utilized together with analytical tools such e.g. SWOT and
Porter's Five Forces to provide a clear understanding of a situation and related internal and
external factors. PESTEL stands for Political, Economic, Social, Technological, Environmental
and Legal factors. Each factor will be elaborated on below in form of a table.
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Source: Business-to-you.com

1.4. Classification of the business environment

Business environment can be classified as static, dynamic, internal, external, market, and non-
market environment..

1.4.1. Static Environment

Static environment refers to environments were little change occurs as regards to change in
factors. Businesses are affected by a multiplicity of factors and forces that constitute the
business environment. Since most of these factors are usually uncertain and unpredictable, the
business firm does not have much control over them. However, certain factors may remain
fairly static for example, the social and psychological altitudes of people in an economy takes
several decades or centuries to change. The static environment therefore makes the business
manager's task quite easy since they can formulate policies with confidence and certainty.
Traditional and backward economies tend to have comparatively static environment.

1.4.2. Dynamic Environment

Dynamic environments as compared to static environment of course constitute those

environments were factors change very quickly and this change cannot be easily anticipated. In
a dynamic economy or population, human wants, capital resources including technology are
continuously changing and as such the economic environment also changes.

In view of this dynamic change occurring, the business manager must be very alert in
identifying the changes in dynamic factors of the environment and should revise the business
policies as per the changes forecasted.
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1.4.3. Internal Environment

Internal environment refers to the internal factors of the business. Internal environment
greatly influences the strategy of business operations and decisions. This is because the internal
environment is related to the value system of the founders, the mission and objectives of
business organization and the business policies adopted contributing to the success of the
business. The structure of the business organization as well as the composition of the Board of
Directors are also important aspects of the internal environment because these greatly
influence the decisions that are undertaken in the day-to-day business operations. The skill,
quality, attitude and morale of the work force in a business organization contributes
tremendously to the strength or weakness of the organization. All these factors play an
important role in shaping the fortunes of the business and every business manager is required
to have a good understanding of these factors.

1.5.4. External Environment

As you may have guessed, external environment refers to factors that are outside the business.
The business unit normally will have no control over these factors. Business external
environment can be classified into two main types namely; micro and macro environment.

1.4.4.1. Micro-Environment

The micro environment includes factors that act and react in the immediate environment of the
business enterprise as you may have guessed. These factors will affect the performance of the
company and naturally. It includes suppliers of raw materials, marketing intermediaries,
competitors in business, customers and also the public.

1.4.4.2. Macro Environment

The macro environment on the other hand consists of societal forces that have an effect on the
micro environment. These are include demographic, technological, political and not forgetting
cultural factors. International factors such as world economies and war also fall within the
scope of the macro environment.

1.4.5. Market Environment and Non-Market Environment

Loosely market environment informs us about how the business firm’s environment is
characterized by market forces like demand and supply, the number of firms competing in the
same market and the number of similar products in that market resulting in either price
competition or non-price competition among the competing firms. Non-marketing environment
on the other hand refers to the laws enacted by the government, social traditions and many
other factors.
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1.5. Components of the business environment

Business environment comprises of two components; internal and external environments. We

shall start by looking at the internal environment.

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1.5.1. The internal environment

The internal environmental factors of a business can to a certain extent be controlled. This is
because internal factors are closely related to the business, for example factors such as value
systems and objectives can easily be modified by the firm to improve efficiency. However, not
all internal factors can be changed that easily.

1.5.2. The external environment

The external environment is generally classified into micro environment and macro
environments. These two components cannot be easily regulated or controlled by the business
manager.

1.5.2.1. The Macro Environmental Elements

Building on the previous discussion, the macro environmental elements are as follows:

1.5.2.1.1. Political environment and Business

This involves the local government's influence on the business environment. Ordinarily it
focuses on new business regulations in areas such as tax administration as well as adjustments
in customs duty. It could also include the fiscal policy of the government and it might be
important in determining which industry gets support from the government. Other issues
include any tariffs the government may impose on certain industries.
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1.5.2.1.2. Economic Environment and Business

These are factors concerned with economic performance in the area in which a company
operates. It influences business operations through fluctuations or changes in interest rate,
exchange rates, inflation and competitive environment. Other things to critically consider
include interest rates, the purchasing power of the consumers and foreign exchange.

1.5.2.1.3. Social Environment and Business

Social factors are normally concerned with cultural aspects such as norms, beliefs and values.
These influence business based on various psychological factor such as perceptions, religion
and other motivation factors that influence consumer behavior. The social factors can influence
a business through consumer behavior due to different aspects of values and beliefs. The
business must also analyzes aspects of the social environment such as the demographics, the
population size and dominant cultural trends that might affect business strategy.

1.5.2.1.4. Technological Environment and Business

Technological factors have been an integral part for businesses to consider, they have gained
even more importance recently. These represent the prevalent technological trends in an area
and how they can be either beneficial or detrimental to the success of the business. They
include such things as the devices owned, the internet and cellular connectivity and any
emerging trends in technology that might affect the business’s activities in the future. For
example, the readily availability of the internet negatively affected the business of internet cafe.
At first there was a boom in this business but as the internet became more easy to access and
computers became cheaper, few customers continued using internet cafes.

1.5.2.1.5. Legal Environment and Business

This poses a huge effect to the business environment as it basically governs the various aspects
of operations. The business has to analyze the specific laws that affect the businesses operating
in specific area.

1.5.2.1.6. Ecological Environment and Business

These are environmental factors that are critical to running of a business smoothly.
Environmental factors are vital in an increasingly environmentally conscious world. The
company has to determine how its practices and location will affect the surrounding
environment and take mitigating measures to ensure the environment is preserved. A good
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example is the carrying out of environmental impact assessment before any mining and milling
business in order to protect the environment.

1.5.3 The specific (Micro) Environment Elements

The micro environment consists of Suppliers, Customers, Competitors, Government and

Pressure groups. Companies are not all affected by the micro environment in the same way
because of the size, capacity, capability and strategies are different. For example, suppliers of
raw materials giving more concessions to big companies. However, they may not give the same
concessions to small companies due to reduced volumes being purchased. When it comes to
competition, competitors will not mind about the rival company if it is a small organization, but
the will be very concerned if the rival organization is large. Micro environment might be
similar in various firms. In such a case, response of these firms to their micro environment may
differ as each firm will attempt to achieve a higher success level.