EXTERNAL BUSINESS ENVIRONMENTS

EASSAY

Word Count: 1076.

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 Business Environment and Impact of the Business Environment on
Business Operations
The business environment encompasses every factor within and around a business which impacts
the activities of a business or gets affected by the business activities. While running the business,
considering the business environment is very necessary. A business environment encompasses
three types of environmental factors that are critical for a business to consider- internal factors,
micro factors and macro factors. These factors are all necessary for a business to consider while
taking decisions and executing them (Worthington and Britton, 2009). The environmental factors
of a business determine its competitive advantage of the business and the sustainability of the
competitive advantage business. Aetna Inc. is a company which has perfectly measured the
effect of its micro and macro environmental factors and controlled the internal environmental
factors accordingly to create a competitive advantage for the company.

A business or company can analyse the environmental factors in various ways. First, the factors
of the business environment need to be addressed. There are three environment phases or factors
within a business environment (Prajogo, 2016). First of all the internal factors of a business are
within the control of the management and can be adjusted according to the effect of the external
factors. SWOT analysis is used to analyse the internal environment and internal competencies of
a business. Second, the factors that are revolving around the business can affect the business
activities and can get affected by the business in a certain stage of growth. These are called the
micro environmental factors and these factors are known as the market forces (Nicolau, 2005).
Third, the factors which are completely out of the control or intervention of a business- are the
macro-environmental factors. These factors affect the micro factors and the internal factors of a
business and alter the decision-making criteria. PEST or PESTLE analysis is used to analyse the
macro-environmental factors of a business.

Macro environmental factors are important factors that affect the operations of a business. In that
case, PEST analysis can be used to analyse the PEST factors of an industry. PEST factors cover
political, economical, social and technological factors (Greene and Segal, 2004). In the case of
the US’s health insurance industry, the pollical factors are very supportive. The US has the most

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stable political condition in the world and it heavily encourages business activities which have
helped insurance companies to grow. In case of economical factors, the US has the strongest
economy in the world and the stability of the US economy has helped insurance businesses to
gain more profit through investing their funds from premiums in various profitable businesses. In
case of social factors, The US society is one of the most fragmented societies in the world
(Garcia-Zamora et al, 2013). One of the most important factors influencing American culture is
social class, which is typically defined as a combination of income, occupational prestige, and
educational accomplishment. This proper combination has helped US insurance companies,
especially the health insurance companies to gain popularity as the people in the US are more
concerned about their health and future condition. In the case of technological factors, the US
has the most advanced technological structure which has helped US health insurance companies
to expand their business digitally and helped them to reach customers more efficiently and
effectively (Foley-Fisher et al,2020). For example, clients can pay their premiums through online
services and can also fill up insurance forms using digital forms.

The micro environmental factors are important factors which can affect the business activities
and can be affected by the business with a proper competitive advantage. To analyse the micro
environmental factors of the health insurance industry in the US, Micheal Porter’s five forces
model can be used (Demigruc-Kunt et al, 2006). The five forces of the US’s health insurance
industry are the bargaining power of suppliers, the bargaining power of customers, the threat of
substitutes, the threat of new entrants and overall competition within the market. In the case of
health insurance businesses, the suppliers are mainly the production businesses in which the
insurance companies invest their money and the banks and the suppliers have a high degree of
bargaining power. Also, customers' bargaining power is high in the health insurance industry as
there are too many choices for them (Dafny et al, 2012). The same can be said in the case of the
substitute threat as there are various substitute products available such as bank deposits, bank
saving schemes etc. There is ample threat of new entrants as the market is open for everyone due
to a capital market economy system. The overall competition within the industry is very high
with various insurance companies and their diversified offerings.

Internal environmental factors are very necessary to be analysed by the management of a

company. The internal capabilities of a company decide its competitive advantage. To analyse

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the internal environmental factors of Aetna, SWOT analysis can be used. In the case of Aetna,
their main strength comes from their diversified offerings to the customers as well as the quality
of their service and their affordability and brand value which has helped the company to attract
and retain customers (Cummins et al, 2010). In case of the weakness of Aetna, the company has
a weakness in claim settlements which is causing a delay in settling claims as a result brand
value of the company is facing a significant risk of falling. In the case of Aetna’s opportunities,
due to the company’s renowned brand name and supportive technological infrastructure, the
company can make a name itself in the digital insurance market (Cadle et al, 2014). In the case
of Aetna’s threat, an increased amount of claims in a short time of notice can be a bigger threat
for the company as it will reduce the company’s profit and will decrease efficiency in claim
settlements.

Every element in and around a business that influences its operations or is impacted by those
operations is referred to as the business environment. When conducting a business, the business
environment must be taken into account. The internal elements, micro factors, and macro factors
that make up a business environment are crucial for a company to take into account. All of these
elements must be taken into account by a firm while making decisions and carrying them out.
The competitive advantage of a firm and its sustainability as a competitive advantage is
determined by its environmental characteristics.

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References
Cadle, J., Paul, D. and Turner, P., 2014. Business analysis techniques. Chartered Institute for IT.

Cummins, J.D., Weiss, M.A., Xie, X. and Zi, H., 2010. Economies of scope in financial services:
A DEA efficiency analysis of the US insurance industry. Journal of Banking &
Finance, 34(7), pp.1525-1539.

Dafny, L., Duggan, M. and Ramanarayanan, S., 2012. Paying a premium on your premium?
Consolidation in the US health insurance industry. American Economic Review, 102(2),
pp.1161-85.

Demirguc-Kunt, A., Love, I. and Maksimovic, V., 2006. Business environment and the
incorporation decision. Journal of Banking & Finance, 30(11), pp.2967-2993.

Foley-Fisher, N., Narajabad, B. and Verani, S., 2020. Self-fulfilling runs: Evidence from us
life insurance industry. Journal of Political Economy, 128(9), pp.3520-3569.

Garcia-Zamora, E., Gonzalez-Benito, O. and Munoz-Gallego, P.A., 2013. Organizational and

environmental factors as moderators of the relationship between multidimensional
innovation and performance. Innovation, 15(2), pp.224-244.

Greene, W.H. and Segal, D., 2004. Profitability and efficiency in the US life insurance
industry. Journal of Productivity Analysis, 21(3), pp.229-247.

Nicolau, J.L., 2005. Valuing the business environment on a daily basis. European Journal of
Operational Research, 164(1), pp.217-224.

Prajogo, D.I., 2016. The strategic fit between innovation strategies and business environment in
delivering business performance. International journal of production Economics, 171,
pp.241-249.

Worthington, I. and Britton, C., 2009. The business environment. Pearson education.

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