Written by Business environment may be defined as the aggregate of all events, factors, and forces that influences the smooth operation of a business.
It is the combination of internal and external factors that influences the operating situation of a business.
Business environment may also refer to the external and internal factors that affect the operations and performance of a business.
In essence, the business environment consists of all those factors that have a large bearing on the business.
These factors are customers, socio-political organizations, suppliers, government regulations, organizational culture, and economic conditions.
As you will see in the next heading, some of these factors affect the business directly, while others affect the business indirectly
Types of Business Environment
The business environment can be divided into two categories, namely; internal and external environments.
Internal environment
The internal environment consists of all factors that influence business and which are present within the business itself.
These factors have a direct influence on the operation of the business. They can easily be controlled by the business.
Managers have a fair degree of certainty and control when making decisions about the internal environment of the business.
The internal environment includes the following factors:
1. Value system: It is the ethical beliefs and principles that guide the business in achieving its mission and objectives.
It is a set of core values that are shared by the business employees and which shape the culture and identity of the organization.
The value systems of a business are a critical factor in the internal business environment because it determines the orientation and behaviour of the business towards its employees and customers.
Value systems set the standards for how the business conducts itself and interacts with its various stakeholders.
2. Owners: These are individuals or entities that have invested in the business and therefore have ownership rights over the business.
They are an essential part of the business’s internal environment as they have a significant influence on its affairs.
The owners of the business can be an individual as is the case of a sole proprietorship business, a partner as is the case of a partnership business, a member as is the case of limited liability companies, and a shareholder as is the case of corporations.
Owners serve as an integral part of the internal environment of the business.
They provide the necessary capital for the business to start and operate, and as a result, have a significant say in the direction and management of the business.
3. Mission, vision, and objectives: A business’s mission, vision, and objectives are key components of its internal environment.
They define the purpose, goals, and actions of the company.
A business mission describes the core purpose of the company, its vision describes the goal that the business seeks to achieve in the future, and its objectives describe specific actions and timelines for achieving this goal.
Mission, vision and objectives are very important as they serve as the building block for achieving the short and long-term goals of the business.
3. Employees: Employees are a vital component of a business’s internal environment.
They are the individuals who are employed by the business to carry out various tasks and functions.
Employees, either individually or collectively as part of a labour union, have the ability to negotiate with top management regarding the wages and working conditions of different categories of employees.
Employees are a key part of the internal environment of the business as their effects on the business are far-reaching.
In fact, good relations between management and employees are important for a business to run smoothly.
If the relationship between management and employees is bad, it can disrupt business operations.
4. Organization culture: Organizational culture refers to the values, beliefs, behaviours, and attitudes that shape the way people work and interact within a business organization.
It is a key part of the internal business environment as it determines how well an organization can manage both its internal and external affairs.
It also affects the way employees interact with each other, with customers, and with the business as a whole.
5. Resources of the business: Business resources consist of anything and everything that is used in the production process of the business.
They consist of human, financial, physical, and intellectual resources that are used in the production processes of a business.
The quality of the resources available to a business significantly affects its ability to compete in the market.
For example, a company that has highly skilled and motivated employees may be able to produce goods and services of higher quality than a company that has a less skilled workforce.
Similarly, a company with ample financial resources may be able to invest in new technologies and expand its operations more quickly than a company with limited financial resources.
Therefore, the resources available to a business are a crucial part of its internal environment as it determines the competitive advantage and disadvantages of the business.
External environment
The external environment consists of all the forces outside the business that can affect the operation and functioning of the business.
These factors are usually not under the control of the organization.
The external environment includes political, economic, social, technological, legal, and environmental factors.
1. Political factors: Government intervention and the general political climate that can affect a business are called political factors.
They include government policies, rules and regulations, and other factors that can impact how a business operates in a country.
Political factors that may affect the business are tax policy, fiscal policy, trade tariff, change in government and political stability of the country.
Given the significant role political factors play in the operation of a business, business managers must stay informed about recent happenings in the political world so as not to be caught unaware by political changes that may affect the business operation.
2. Economic factors: These are directly related to the economic performance of the country in which a business is located.
Economic factors include inflation rate, taxation issues, exchange rate, income levels, unemployment rate and general economic conditions of the country in which the business operates.
These factors can have a long-term effect on the performance of a business.
For example, when there is high unemployment, consumers’ purchasing power decreases, leading to fewer goods being purchased.
Therefore, businesses should take time to study economic factors and develop a strategy to mitigate the negative effects of unfavourable economic changes.
3. Social factors: Every society has its cultural characteristic. Social factors are the cultural characteristics that make up the social environment of the business.
Social factors include customs, values, norms, beliefs, social lifestyle, degree of intelligence, consumer buying patterns, education, and demographic conditions of the country in which a business operates.
Social factors are important as they often form the backbone of demand for goods and services in a country.
As we have observed in the case of many products, the demand for many products changes as social attitudes towards them change, and businesses that fail to adapt to these changes may find themselves at a disadvantage in the market.
Hence, a business should provide goods that correspond to the culture of the people of the society in which it resides.
4. Technological factors: Technological factors consists of various technological development and innovation that could affect the marketing and selling of a company’s goods favourably and unfavourably.
Technological factors include research and development, technological development, global trends in technology, and growth in information and communication technology.
With technology changing very fast, business managers need to constantly monitor and integrate suitable technology into their operations.
5. Legal factors: These are the most complicated external factors that affect business operations.
Legal factors encompass a wide range of laws and regulations that businesses must comply with, including environmental regulations, labour laws, copyright and patent laws, health and safety regulations, and tax laws, among others.
Compliance with legal requirements is essential for the success of any business.
Businesses must, therefore, have a good understanding of the relevant laws and regulations in their respective industries and locations as failure to comply with these laws and regulations can result in costly legal battles, fines, or even reputational damage.
6. Natural factors: These refer to the physical environment and all natural resources that can have affect the operation of a business.
It includes geographical location, weather, climate, mineral resources and anything else in the environment that may affect the company.
Industries like agriculture and mining depend heavily on natural resources and the environment.
Therefore, any changes in the natural environment, such as climate change, droughts, and natural disasters, can severely impact their operations.
For example, a prolonged drought can limit the water needed for farming, resulting in lower crop yields and decreased revenue for farmers.
Furthermore, as global warming becomes a significant source of concern worldwide, businesses must consider its impact on their operations and adopt environmentally sustainable practices so as to remain relevant.
