TOPIC 2

BUSINESS
ENVIRONMENT
ASSESSMENT
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 Learning Objectives
At the end of this chapter, students
should be able to:

I. explain the components of the business environment;

II. list out the major components of a macro
environment;
III.describe the major components of a micro
environment, and
IV.explain the major factors of internal elements.

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 WHAT IS BUSINESS
ENVIRONEMENT ASSESSMENT?
Environmental assessment is a strategic tool.
It is a process to identify all the external and internal
elements, which can affect the organization’s
performance.
The analysis entails assessing the level of threat or
opportunity the factors might present.
These evaluations are later translated into the
decision-making process.
The analysis helps align strategies with the firm’s
environment.
 Components of a Business Environment

• There is a wide range of forces that can

affect a company’s performance in the
business environment.

• The business environment comprises of:

– external environment ~ macro(general)
environment & micro (industrial) environment
– Internal environment

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 EXTERNAL ENVIRONMENT
(MACRO ENVIRONMENT)

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 MACRO/EXTERNAL
ENVIRONMENT

• Political & Legislation Factors

• Economic Factors
• Social Factors
• Technological Factors

4-7
• The macro environment can influence
business decision-making in the long term.
• This involves elements outside of the
direct control of the business. consists of
main components:
(1) Political & Legislation
(2) Economy
(3) Socio-culture
(4) Technology
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 “P” FOR POLITICAL FACTORS
• The political factors take the country’s current
political situation. It also reads the global political
condition’s effect on the country and business.
• When conducting this step, ask questions like
“What kind of government leadership is impacting
decisions of the firm?”. Some political factors that
you can study are:
– Government policies
– Taxes laws and tariff
– Stability of government
“P” FOR POLITICAL FACTORS
Government policies
– A government policy statement is a declaration of a
government's political activities, plans and intentions relating to a
concrete cause or, at the assumption of office, an
entire legislative session. In certain countries they are
announced by the head of government or a minister of the
parliament.
Taxes and tariff
– A tax is a financial charge or other levy imposed upon a
taxpayer (an individual or legal entity) by a state or the functional
equivalent of a state to fund various public expenditures.
– A tariff is a tax on imports or exports (an international
trade tariff).
“P” FOR POLITICAL FACTORS

Stability of government
– Government stability is the durability and
integrity of a current government
regime. This is determined based on the
amount of violence and terrorism expressed
in the nation and by citizens associated with
the state. Also a stable of society in a country.
 ‘L’ FOR LEGAL FACTORS

• Legislative changes take place from time to time.

Many of these changes affect the business
environment.
• If a regulatory body sets up a regulation for
industries, for example, that law would impact
industries and business in that economy.
• So, businesses should also analyze the legal
developments in respective environments.
Consumer Legislation
Labour Market Legislation
 ‘E’ FOR ECONOMIC FACTORS

• Economic factors involve all the determinants of

the economy and its state. These are factors that
can conclude the direction in which the economy
might move.
• The economic environment can greatly influence
organizations. However, the affect of economic
forces may be different between organizations.
• So, businesses analyze this factor based on the
environment. It helps to set up strategies in line
with changes.
 ‘E’ FOR ECONOMIC FACTORS
• Can be divided into 3 categories:
 Current economic conditions
- conditions within a country that exist in the short term
 Economic cycles
- prosperity cycle, recession cycle, depression cycle,
recovery cycle
 Structural changes

• The determinants you can assess to know how

economic factors are affecting your business below:
• The inflation rate
• The interest rate
• Credit accessibility
• Unemployment rates
‘E’ FOR ECONOMIC FACTORS

Business Cycles
√ The term business cycle refers to the
recurrent ups and downs in the level of
economic activity, which extend over several
years.
√ Individual business cycles may vary
greatly in duration and intensity.
√ All display a set of phases.
 Business Cycle-one cycle through 4
phases
Peak
Peak

ry
ve
Real GDP
per year

Re

co
ce

Re
ss
io
n

Trough

Time
One cycle
 PEAK
This phase is known as peak phase. In other
words, peak phase refers to the phase in which the
increase in growth rate of business cycle achieves
its maximum limit.

The economic factors, such as production, profit,

sales, and employment, are higher, but do not
increase further.

There is a gradual decrease in the demand of

various products due to increase in the prices of
input.
 RECESSION

In recession phase, all the economic factors, such

as production, prices, saving and investment, starts
decreasing.
Over the time, producers realize the surplus of
supply when the cost of manufacturing of a product is
more than profit generated. This condition firstly
experienced by few industries and slowly spread to
all industries.
Producers avoid any type of further investment in
factor of production, such as labor, machinery, and
furniture.
 THROUGH
During the trough phase, the economic activities of
a country decline below the normal level.
In this phase, the growth rate of an economy
becomes negative. There is a rapid decline in
national income and expenditure.
In this phase, it becomes difficult for debtors to pay
off their debts. As a result, the rate of interest
decreases; therefore, banks do not prefer to lend
money. Consequently, banks face the situation of
increase in their cash balances.
Apart from this, the level of economic output of a
country becomes low and unemployment becomes
high.
 EXPANSION/RECOVERY

there is an increase in various economic factors,

such as production, employment, output, wages,
profits, demand and supply of products, and sales.

In addition, the prices of factor of production and

output increases simultaneously.

In this phase, debtors are generally in good

financial condition to repay their debts; therefore,
creditors lend money at higher interest rates. This
leads to an increase in the flow of money.
 Who Cares?????
• Why should you care about the business
cycle and economy?

• Lots of reasons!
 “Don’t quit that job!”
• If the economy is going into a contraction,
jobs will become more scarce. If you quit,
you may not find another job!

• But, if the economy is in a period of

expansion, jobs are readily available. It
may be a good time to switch careers.
 “Should I make a big purchase?”
• Only if you know that you won’t lose your
job in a contraction. So, buy your house
during an expansion.

HOWEVER,
• When the economy starts to slow down
(contraction), interest rates will decrease.
Wait to buy a house until the rates drop to a
low point, if you are sure you won’t lose your
job.
 ‘S’ FOR SOCIAL-CULTURAL
FACTORS
• Countries vary from each other. Every country has a
distinctive mindset. These attitudes have an impact on the
businesses. The social factors might ultimately affect the
sales of products and services.
• Socio-cultural factors are the larger scale forces within
cultures and societies that affect the thoughts, feelings and
behavioral. Such factors include: Attitudes. Child rearing
practices.
• Some examples are religion, attitudes, economic status,
class, language, politics and law. These factors can affect
quality of life, business and health.
 ‘S’ FOR SOCIAL-CULTURAL
FACTORS
• Socio-cultural factors are customs, lifestyles and values
that characterize a society or group.
• Cultural aspects include concepts of beauty, education,
language, law and politics, religion, social organizations,
technology and material culture, values and attitudes.
• Social factors include reference groups, family, role and
status in society, time and available resources.
• An understanding of socio-cultural factors is crucial in
developing marketing strategies for businesses or
organizations seeking action from particular groups.

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 Questions…???
1) Why is culture so important?
- Culture is important for a number of reasons because it
influences an individual's life in a variety of ways, including values,
views, desires, fears, views and worries. In addition, belonging to a
culture provides people with a sense of identity, purpose and
belonging.

2) What are the components of culture?

 Language
 Values
 Beliefs
 norms.

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• LANGUAGE is used for communication. It can be written or
spoken. Even when a culture uses the same basic language as
another culture, differences in terminology and inflection create
new meanings.
• VALUES help define acceptable behavior within the society.
Values can be different for each group to which a person
belongs. For example, it may be acceptable in the family group
to eat certain foods that are not accepted within the religious
group a person chooses.
• BELIEFS fulfill the spiritual needs of a culture. A whole culture
can be based on one set of beliefs, yet a larger cultural group
may have many different sets of beliefs.
• NORMS are the rules, mores and traditions within a culture. As
a group develops laws and regulations, norms change. A law
that was necessary 100 years ago may not be needed in
modern times.
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 ‘T’ FOR TECHNOLOGICAL
FACTORS
• Technology is advancing continuously. The
advancement is greatly influencing businesses.
• Performing environmental analysis on these
factors will help you stay up to date with the
changes. Technology alters every minute.
• This is why companies must stay connected all
the time.
• Firms should integrate when needed.
Technological factors will help you know how the
consumers react to various trends.
 A) BREAKTHROUGH (PURE) INVENTION

Pure invention refers to the creation of something new that is different

from existing technology or products.

For this reason, invention usually has economic value and has no
competitors at initial stages and is often a monopoly by the individual who
has the legal right on that invention. But there are disadvantages with
inventions because there is no market at the early stage.

New inventions can create new markets and opportunities for business,
for example, the invention of semiconductors that created business
opportunities in computers.
 B) PROCESS INNOVATION
Process innovation refers to the small changes in
design, product formulation and manufacturing,
materials and distribution.
Scanning and monitoring changes in technology is
not an easy task because information is not easily
available.
Even the scientist who is involved in basic
research does not know when the
commercialization stage is reached.
However, it is a great advantage and opportunity if
entrepreneurs know this information.
• It is true that industry factors have an impact on
the company performance.
• Environmental analysis is essential to determine
what role certain factors play in your business.
• This analysis allows businesses to take a look at
the external factors. Many organizations use
these tools to project the growth of their company
effectively.
• The analyses provide a good look at factors like
revenue, profitability, and corporate success.
 INDUSTRIAL ENVIRONMENT
(MICRO ENVIRONMENT)

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 MICRO ENVIRONMENT
• Comprises components related to stakeholders. These
includes customers, competitors, suppliers, financial
institution, govt. agencies and non-governmental
organizations.

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 MICRO ENVIRONMENT
 Consumers ~ people and organizations that acquire goods &
services from organization. Eg: different needs and wants.

 Competitors~ other organizations in the same industry or

another type of business. Eg: the degree of competition

 Suppliers ~ those who provide equipment, supplies, raw

materials, etc to industries. E.g. price, quality.

 Financial Institutions ~ institution that provides financial

services for its clients or members. E.g. interest rate, funds.

 Government Agencies. E.g. MARA, SSM.

 Non-Government Organizations ~ interest groups that can

greatly influence business. E.g. Consumer & Trader
Associations.
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 INTERNAL ENVIRONMENT

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 The internal environment can also directly
influence decision-making of entrepreneurs.
However, they control these elements. The
internal organization environment consists of
the following elements:

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 INTERNAL ENVIRONMENT
(a) Structure

 Hierarchical arrangement of task and people which determines:

- determines the flow of info within the firm

- areas of responsibility for specific departments

- power for decision making

 Organizational structure must be suitable for a new venture to adapt to

changes in the environment.

 E.g. flat and tall structure

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 INTERNAL ENVIRONMENT

Flat structure

Tall structure
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 Tall Vs. Flat Organizational
Structure
Flat Organizational Structure
 Flat structures have fewer management levels, with
each level controlling a broad area or group.
 Flat organizations focus on empowering employees
rather than adhering to the chain of command.
 By encouraging autonomy and self-direction, flat
structures attempt to tap into employees’ creative
talents and to solve problems by collaboration.
 Tall Vs. Flat Organizational
Structure
Tall Organizational Structure
 Large, complex organizations often require a taller
hierarchy.
 A tall structure results in one long chain of command
similar to the military. As an organization grows, the
number of management levels increases and the structure
grows taller.
 In a tall structure, managers form many ranks and each
has a small area of control. Although tall structures have
more management levels than flat structures, there is no
definitive number that draws a line between the two.
 INTERNAL ENVIRONMENT

(b) Resources

 Refer to the people, information, facilities, infrastructure, financial, tangible and

intangible assets, technology and reputation.

 Entrepreneurial personality characteristics, skills, energy, ideas, knowledge and

experiences are part of entrepreneur resources.

(c) Culture

 Refers to ‘a pattern of shared, basic assumptions the firm has adopted from its

dealings with external problems and the internal integration of values’.

 Positive culture and values should be inculcated into the business organization for the

benefit of all human resources.

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THANK YOU..