BUS 112: INTRODUCTION TO BUSINESS

TOPIC: BUSINESS ENVIRONMENT

Learning objectives:

1. To understand the concept of the environment as it relates to business

2. Know the different types of environments that exists and which the business entities operates in
3. To have a rudiment knowledge of the international business environment
4. To have firsthand knowledge of the primary tools used to analyze and understand the business environment.

Definition of Business environment:

The model for business success requires two basic elements- the individual and the environment. The individual are the
owners and controllers of business entities that carry out business activities in the environment.

BUSINESS: is an economic activity which is related with continuous and regular production and distribution of goods and
services for satisfying human wants. It refers to a form of activity conducted with a objectives of making profits for the
benefit of those on whose behalf the activity is conducted.

THE CONCEPT OF THE ENVIRONMENT: The Webstar New Collegiate Dictionary defines the environment as the
aggregate of all the external conditions and influence affecting the life and development of organisms. The environment is
the outer, physical and biological systems in which man and other organisms live in a wholly albeit, a complicated one with
many interactive components. Abrahams (1971) defined the environment as the sum total of all external conditions
influencing the growth and development of an organism. These factors could be physical, biological and cultural. The

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physical environment may include all aspects of geographical and ecological nature- such as weather, climate, atmosphere,
water, soil etc.

THE CONCEPT OF THE BUSINESS ENVIRONMENT: The business environment is the totality of both the internal
and external factors that influence a company’s operating situation, including employees, customers, management, supply
and demand and business regulation. The business environment can include factors such as clients, suppliers, competitors,
and owners, improvement in technology, laws and government activities, markets, social and economic trends.

It may be defined as the total surroundings which have direct or indirect bearing on the functioning of the business. It means
the sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but that may
affects its performance.

The Features/ Nature/Characteristics of the Business Environment

The basic characteristics of the business environment are:

1. Totality of external forces: it is the sum total of all things external to the business firms and as such, it is aggregate in
nature.

2. Specific and General Forces: (such as, investors, customers, competitors and suppliers) affects individual firms directly
and immediately in their daily activities. General forces (like, political, social, legal & tech, conditions) all have impact in
business firms and may affect individual firms indirectly.

3. Inter-relatedness: Different elements or parts of the business environment are closely inter- related and connected to each
others.

4. Dynamic in nature: the business environment is dynamic in that it keeps on changing whether in terms of technology
improvement, shift in customer preferences or entry of new competitors in the market. Thus, the business environment is
not static.

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5. Uncertainty: this means, it is very difficult to predict/ forecast the future happenings, especially, when the changes are
taking place too frequently, e.g., the information technology / fashion industries.

6. Complexity: Since the environment consists of numerous interrelated and dynamic conditions or forces which arises from
different sources, it becomes extremely difficult to comprehend at once, what exactly makes-up a given environment.

7. Relativity: it is a relative concept since it differs from one country to another and even region to region, e.g. political
conditions in the USA, differs from those of China and Russia and Nigeria.

Importance of Understanding the Business Environment:

i. It enables the firm to identify opportunities and getting the first mover- advantage.

ii. It helps the firm to identify threats and early warning signals.

iii. It helps in tapping useful resources

iv. it helps in coping with rapid changes; e.g. Turbulent market condition, less brand loyalty, fragmented market, more
demanding customers, rapid changes in tech. and intense global competition.

v. It helps in assisting in planning and policy formulation. The environment is the sources of both opportunities and threats
for a business enterprise. Its understanding and analysis could be useful and basis for deciding the future course of action
(planning) or training guidelines for decision making (policy).

vi. It helps in improving performance: this relates to whether or not it really makes a difference in performance of an
enterprise. But studies have confirmed that an enterprise is closely bounded up with what is happening in the environment.

vii. It helps image building: Understanding the environment helps in improving organization’s image (reputation) by
showing their sensitivity to the environment within which they are working: e.g. cleaning up the environment and offering
corporate social responsibility (CSR) activities.

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INTERNAL BUSINESS ENVIRONMENT

The constituents of the internal environment and impact

- Organizational structure—basics

- Organizational culture

- Human resource

- Other organization internal resources components: customers, competitors, shareholders, suppliers and financial
institutions.

What is internal business environment? It is those activities and relationships within the organization that involved in the
transformation of inputs into outputs. The internal activities and relationships adds value to the inputs (open system and
interact with external environment). The internal business environment, are conditions, entities, events, and factors within
an organization that influence its activities and choices, particularly the behaviours of the employees. Furthermore, the
internal environment must adapt to suit the particular characteristics of the external environment if the business is to be
successful. There is no one to organize and manage the internal environment but numerous possible ways, depending on
what works best in the particular situation of the firm.

The task environment or Industry environments: these are factors in the external environment that specifically resides in a
particular industry and affect competition such as suppliers, customers, competitors and substitute products. The task
environment consists of factors that directly affect and are affected by the organisation’s operations. These include
regulatory agencies, competitors, customers, strategic partners and so on.

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 The Internal Business Environment

VALUE SYSTEM

MISSION &
CORPORATE CULTURE VISION/OBJECTIVE
& STYLE OF TOP
MANAGEMENT

BUSINESS ORGANISATION
HUMAN RESOURCES

PHYSICAL RESOURCES
TECHNICAL
CAPABILITIES
LABOUR UNIONS

ORGANISATIONAL
STRUCTURE

The Basic Elements of Internal Environment

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1. Value system: it means the ethical beliefs that guide the organization in achieving its mission and objectives. It also
determines its behavior towards its employees, customers, and the society at large. It affects the business choice and
options of business policies and practices.
2. Mission, Vision & Objectives: the objectives of all business firms are assumed to be maximization of long run
profits. But mission statement is different. A mission is defined as the overall purpose or reason for its existence
which guides and influences its basic decisions and economic activities.
3. Organisation Culture: Culture is the collective behavior of members of an organization and the norms, language,
symbols, systems, values, visions, beliefs and habits that they attach to their actions. It is the foundation of the
organisation’s internal environment. It plays a major role in shaping managerial and employees’ behavior, and a
determinant of how well the organization will perform. It is the behavior of humans within the organization and the
meaning that people attach to those behavoiurs. It is also a pattern of such collective behaviours and assumptions
that are taught to new organizational members as a way of perceiving and even thinking and feelings. Organizational
culture can be profiled as follow: innovative, aggressive, outcome-oriented, stable, people-oriented, team-oriented
and detail- oriented. Also, organizational culture can be classified into four types; power culture, role culture, task
culture and personal culture.
4. Organisational structure: This refers to the ways responsibility and powers are allocated inside the organization
and work procedures are carried out by organizational members. Minterzberg (1972) defined organizational culture
as the framework of relationships on jobs, systems, operating process, people and groups making efforts to achieve
the goals. It is a set of methods dividing the task to determine duties and coordinates them. Generally, organizational
culture refers to the arrangements of tasks, interrelations of various departments, and levels of authority to achieve
co-operation of effect, delegation of authority, and effective communication along the scalar chain.
Organizational culture has some elements, namely: specialization, formalization, span of control,
departmentalization, centralization and decentralization. Organizational culture could be affected and influenced by
some orgaonsational variables such as: organizational goals and objectives, organizational strategy, environment,
technology, organizational size, employees’ competencies and skillfulness and leadership/management style.
5. Human Resource Quality: It is an important factor of internal environment. The success of a business organization
depends to a great deal on the skills, capabilities, attitudes and commitment of its employees, because of its
importance, company organizes special courses for managers on how to select and manage effectively the human
resources of the company.

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 6. Labour Unions: Labour unions, also determine internal environment of the firm. Unions collectively bargain with
top management regarding wages, working conditions of different categories of employees. Smooth working of a
business organization requires that there should be good relations between management and labour unions.
7. Physical Resources & Technology Capabilities: Physical resources such as plant and equipment and technology
capability of a firm determine its competitive strength which is an important factor determining it efficiency and unit
cost of production. Research and Development R&D capabilities of a company determine its ability to introduce
innovations which enhances productivity of workers. Information, technological growth in recent time have
increased the relative importance of intellectual capital and human resources as compared to physical resources of
companies.

THE INTERMEDIATE BUSINESS ENVIRONMENT

The intermediate environment is that environment that is in-between the internal and the external environment of the
business enterprise. The intermediate environment influences directly, other businesses which it supplies. And this will
affect day-to-day decisions by those businesses. For example: (to switch suppliers). This intermediate environment is also
called task environment. Those that operates in this environment are; creditors, customers, competitors, suppliers and the
community.

INTERNAL

INTERMEDIATE

EXTERNAL

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 THE EXTERNAL/MACRO/MEGA BUSINESS ENVIRONMENT

The external, general/ macro environment of a business is concerned with more distant or remote, but nevertheless
consequential issues (e.g. macroeconomic trends). The general environment concerns events and symbols that operate on a
large scale and form a backdrop to day-to-day business decisions. The general environment also contains issues and events
which are more beyond the capacity of individual organization to influence or control, they are uncontrollable external
factors. These factors that constitute the external or general business environment include: economic, social, technological,
political, demographic, ecological/natural and legal conditions which are considered relevant for decision-making and
improving the performance of an enterprise. In contrast to the specific environment, these factors explain the general
environment which mostly influences many enterprises at the same time.

(a) Economic environment

The economic environment of a nation refers to a set of economic factors that have great influence on business
organisations and their operations. These include gross domestic product, per capita income, markets for goods and
services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All
these help in improving the pace of economic growth. Other economic variables that influence business enterprises are,
interest rates, exchange rates and the inflation rate. These factors have influence on the operation and determination of
businesses. For instance, interest rates affect the costs of exporting goods and the supply and price of imported goods in
an economy. The survival and success of each and every business enterprise depend fully on its economic
environment. The main factors that affect the economic environment are: economic policies; all business activities and
operations are directly influenced by the economic policies framed by the government from time to time. Some of the
important economic policies are:(i) Industrial policy (ii) Fiscal policy (iii) Monetary policy (iv) Foreign investment
policy (v) Export –Import policy (Exim policy)

b.) Social environment

The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life
expectancy rate, career attitudes and emphasis on safety nets etc. The social structure and the values that a society cherishes
have a considerable influence on the functioning of business firms. According to them, trends in social factors affect the

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demand for a company’s productions and how that company operates. For example, during festive seasons there is an
increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the consumers are
becoming more conscious of the quality of the products. Due to change in family composition, more nuclear families with
four children concepts have come up. This increases the demand for the different types of household goods. It is noteworthy
that the consumption patterns, the dressing and living styles of people belonging to different social structures and culture
vary significantly.

c.) Technological factors

This includes research and development activity, technological incentives and the rate of technological change. They can
determine barrier to entry, minimum efficient production level and influence outsourcing decisions. Technological shifts can
affect costs, quality and stimulate further invention, innovation and competition. Technological environment include the
methods, techniques and approaches adopted for production of goods and services and its distribution. The varying
technological environments of different countries affect the designing of products.

d.) Political factors

This is described as the extent and level of government direct and indirect intervention and influence on businesses in an
economy. In particular, political factors include the following; tax policy, labour law, environmental law, trade restrictions,
tariffs, incentives and political stability. It may also involve goods and services which the government provide or has
intention to provide or not to provide. This includes the political system, the government policies and attitude towards the
business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The
stability of the government also influences business and related activities to a great extent. It sends a signal of strength,
confidence to various interest groups and investors. Further, ideology of the political party also influences the business
organisation and its operations.

e) Demographic Environment

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This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the
demand for various goods and services. For example a country where population rate is high and children constitute a large
section of population, and then there is more demand for baby products. Similarly the demand of the people of cities and
towns are different than the people of rural areas. The high rise of population indicates the easy availability of labour. These
encourage the business enterprises to use labour intensive techniques of production. Moreover, availability of skill labour in
certain areas motivates the firms to set up their units in such area

f.) Ecological /Natural Environment

These include environmental aspect such as the availability of natural resources, weather and climate, and climate change,
location aspect, topographical factors, etc. which may affect industries like tourism farming and insurance. Business is
greatly influenced by the nature of natural environment. The growing awareness of the potential impacts of climate change
is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying
existing ones. Further, government’s policies to maintain ecological balance, conservation of natural resources etc. put
additional responsibility on the business sector.

g.) Legal Environment

This refers to set of laws, regulations, which influence the business organisations and their operations. Every business
organisation has to obey, and work within the framework of the law. Included in this component are discriminatory law,
consumer law, antitrust law, employment law, and health and safety law. These factors can affect how a company operates,
its costs, and the demand for its products. Besides, the above legislations, the following are also form part of the legal
environment of business. (i) Provisions of the Constitution: The provisions of the sections of the Nigerian Constitution,
particularly directive principles, rights and duties of citizens, legislative powers of the central, state and local governments
also influence the operation of business enterprises (ii) The judicial Systems: The judiciary has to ensure that the legislature
and the government function in the interest of the public and act within the boundaries of the constitution. The various
judgments given by the court in different matters relating to trade and industry also influence the business activities.

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 SOCIAL FACTORS

POLITICAL FACTORS
ECONOMIC FACTORS

BUSINESS DECISIONS

TECHNOLOGICAL FACTORS

LEGAL FACTORS

DEMOGRAPHIC FACTORS

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ENVIRONMENTAL ANALYSIS

Due to the dynamic nature not static of the business environment, it would not be possible to plan for the future on the basis
of what was done in the past, to carry on in the same way. Analysing the environment becomes imperative. As a result of
uncertainty and ‘bounded rationality’, the business has to strive for survival and adjust to its environment. Bounded
rationality- means that business can never have complete knowledge or information of how the environment will change.
There must be limitations on knowledge and information and the business must operate I somewhat uncertain environment.

ENVIRONMENTAL ANALYSIS PROCESS

The environmental analysis or scanning process consists of four sequential steps:

1. SCANNING: it involves general surveillance of all environmental factors and their interactions in order to,
(i.) Identify early signals of possible environmental changes (ii) Detect environmental changes already
underway.
2. MONITORING: it involves tracking the environmental trends, sequences of events, or streams of activities. It
frequently involves following signals or indicators unearthed during environmental scanning.
3. FORECASTING: strategic decision-making requires a future orientation. Forecasting is an essential element in
environmental analysis. It is concerned with developing plausible projections of the direction, scope and intensity of
environmental changes.
4. ASSESSMENT: In assessment, the frame of reference moves from understanding the environment- the forces of
scanning, monitoring and forecasting – to identifying what the understanding means for the organization.
Assessment, tries to answer questions such as: what are the key issues presented by the environment? and what are
the implications of such issues for the organization?

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TOOLS FOR ANALYSISING AND NDERSTANDING THE BUSINESS ENVIRONMENT

The external environment is made-up of many players and markets but also, includes political, legal, social, cultural,
technological, and other factors and influences. The external environment is multi-faceted and complex. The following are
some techniques employed by strategists to understanding and read the environment.

a.) PEST: is a simple framework for environmental analysis that distinguishes four categories of areas; Political-
Economics- Social and Technological. There are different variants of this type. In each case, the order of the factors
is not intended to indicate their relative importance but rather to produce a memorable acronym ( Sutehrland &
Canwell, 2004).
SLEPT: (Social- Legal- Economics- Political and Technological)
PESTLE: (Political, Economic, Social, Technological, Legal and Ethical)
STEEPLE: (Social, Technological, Economic, Educational, Political, Legal and Environmental)
SPECTACLES: (Social, Political, Economic, Cultural, Technological, Aesthetic, Customer, Legal, Environmental
and Sectoral).
b.) SWOT: (Strengths, Weakness, Opportunities , Threats)
It is used in strategic management to evaluate both the internal and external environment. It is used to analyse the
strengths and weakness in the internal environment and to identify the opportunities and threats in the external
environment.

INTERNAL
STRENGTHS WEAKNESSES

OPPORTUNITIES THREATS
EXTERNAL

c.) ALTERNATIVE SCENARIOS: A scenario is an imagined sequence of future events. It is based on speculations or
form of expert knowledge or data. The idea of alternative scenario is that there are different possible futures to
imagine and be prepared for. These could be assessed in terms of whether they are more or less likely , but it gives
awareness of less likely outcome which allows for preparation of contingency plans- just in case. It also common to
think in terms of ‘best case and worst case’ scenario).

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d.) TREND EXTRAPOLATION: It involves using known variables and data as a guide to unknown ones, or to
estimate data beyond the existing range. It involves using the past as a guide to the future by projecting established
trends. E.g. sales growth.
e.) EXPERT OPINION: It relies on expert sources of opinion to provide understanding of the environment and guide
the company thinking. These are experts outside the company such as consultancy firms. These firms or either
experts may have deep knowledge that is difficult to sustain within the company. The Delphi method draws on the
opinions of a range of experts with each one offering advice independently.
f.) STAKEHOLDER’S ANALYSIS: A stakeholder is any individual, groups or organization that is affected by and
therefore has an interest in the decisions and behavoiur of the business. Some may be direct or indirect influence or
effect. All internal members of business are stakeholders- employees, Directors, and shareholders. External
stakeholders are: customers, suppliers, competitors, politicians and policy makers, and the community or the general
public. In terms of environmental analysis, business need to have an understanding of (i) who their stakeholders are
(ii) the nature and level of their interest in the business (iii) their power to exert influence.

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