MODULE 2 : BUSINESS ENVIRONMENT

Objective: At the end of this lesson students should be able to:

 Define the concept of business environment

 State the characteristics of business environment
 State the importance of business environment
 State the components of business environment
 Examine the internal environment of a company
 Examine the external environment of a company

2.1 Definition of business environment

The environment of any organization is the sum of all conditions, events and influences that
surround and affect it (Davis, K, 1975). Environment can also be view as the examination of the
internal and external factors which have an impact on the functioning of the business. An
environment can be defined as a set of conditions and forces which surround and have direct
influence on the organisation (Garba, 2019; Onuoha 1990, 171). A business concern cannot
operate in isolation; there are forces that shape every business. There are factors that a business
can control which are known as controllable factors (internal environment) and factors the
business cannot control which are commonly known as the uncontrollable factors (external
environment.)

2.2 Characteristics of the business environment

 The business environment is made up of many parts that is the internal and external
environment
 All the parts are interdependent and interrelated.
 The business environment is complex and it is difficult for entrepreneurs to determine risk
factor.
 The business environment is uncertain and unstable and can vary from time to time.
 The business environment is dynamic and unstable. Businesses must be prepared to be both
proactive and reactive, they must adapt to changes.
 Changes in the business environment can affect different businesses in different ways; a

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 change can be positive for one business and negative for another.
 Changes in the business environment can have both short term and long term effects on a
business.
 The external business environment can have a huge impact on a business that it must adapt to
in order to survive. For example, the current global recession.
2.3 Importance of the business environment

1. Environment is complex: The business environment consists of a number of factors, events,

conditions and influences arising from different sources. The entrepreneurs must understand
the complexity of these factors in order to succeed.
2. Dynamic: The environment by its very nature is a constantly changing one. The variables
affecting and influencing it cause it to continually change shape and character. Business
leaders must be ready to adapt to such dynamism.
3. Multi-faceted: The same environmental trend can have different effects on different
industries. For instance GATS (General agreement on trade and service is an opportunity for
some companies but threats for others.
4. Reaching impact: The environment has a far reaching impact on organizations that the
growth and the profitability of an organization depend critically on the environment in which
it exists.
5. Opportunity as well as threat: Development in the external environment often provides
opportunities or threats to businesses. Opportunities may include new technology, customers
respond to new ideas etc. Threats on the other side may include political instability, increase
competitors, change in customers taste and fashion.
2.4 Components of business environment
The business environment of any company is divided into the internal and external environment
I. Internal environment: It is define as all the factors or conditions available within the
company that affects the organization operations. It is also known as the controllable
environment. The internal environment may include the following:
 Vision, Mission and Objectives: The Company’s vision describes its desired and intended
future position. The company vision is divided into the envisioned future and core ideology.
Mission defines the company’s business and the reason for its existence and objectives

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 implies the ultimate aim of the company and the ways to reach those ends. Objectives may be
divided into financial objectives and strategic objectives.
 Corporate Culture: Corporate culture or otherwise called corporate philosophy refers to the
values, beliefs and behaviour of the organization that ascertains the way in which employees
and management communicate and manage the external affairs.
 Organizational Structure: The structure of the organization determines the way in which
activities are directed in the organization so as to reach the ultimate goal. These activities
include the delegation of the task, coordination, the composition of the board of directors,
level of professionalization, and supervision. It can be matrix structure, functional structure,
divisional structure, bureaucratic structure, etc.
 Value System: Value system consists of all those components that are a part of regulatory
frameworks, such as culture, climate, work processes, management practices and norms of
the organization. The employees should perform the activities within the purview of this
framework.
 Human Resources: Human resource is the most valuable asset of the organization, as the
success or failure of an organization highly depends on the human resources of the
organization.
 Physical Resources and Technological Capabilities: Physical resources refer to the
tangible assets of the organization that play an important role in ascertaining the competitive
capability of the company. Further, technological capabilities imply the technical know-how
of the organization.
 Leadership style: leadership is defined as the process of influencing the activities of an
organized group towards goal achievement. The role of company leadership is an essential
internal factor. The leadership style and other management style can impact the organization
performance. The autocratic leadership style can negatively impact organization performance
whereas the democratic leadership style positively impact organization performance.
II. External Environment: External Environment refers to major factors and forces outside
the organization that can potentially affect organization performance. It consists of those
factors which provide an opportunity or pose threats to the business. It is further classified
into micro and macro environment.
a. Micro environment: The immediate surroundings of the business that has a continuous and direct

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impact on it is called Micro Environment. It is also referred as industry environment. It includes
suppliers, customers, competitors, market, intermediaries, etc. which are specific to the business.
 Customers: customers are considered as kings. They are the only reasons why the business
exists. The company may have a variety of customers ranging from wholesalers, retailers and
domestic buyers. Customers are at the heart of the microenvironment. Understanding their
needs, preferences, and buying behavior is essential for a company’s success. Factors to
consider include customer demographics, purchasing power, motivations, and decision-
making processes.
 Suppliers: Suppliers provide the necessary resources, materials, and components for a
company’s operations. Establishing strong relationships with reliable suppliers is important
to ensure the timely availability of quality inputs. Factors to consider include supplier
reliability, pricing, flexibility, and technological capabilities. Any company which depends
only one supplier will be insolvent. It is important for an organization to keep in touch with
different suppliers and to make a regular check on supplier’s attitude and financial
conditions.
 Competitors: Competitors are other companies operating in the same industry, offering
similar products or services. They may be brand competitors existing in a particular industry.
Analyzing competitor strengths, weaknesses, strategies, and market positions helps a
company differentiate itself and gain a competitive advantage. Factors to consider include
product differentiation, market share, pricing strategies, and marketing tactics.
 Market intermediary: Intermediaries are organizations that facilitate the distribution of
products or services from the company to the end customers. They are the links between the
companies and customers. In order words they are middlemen to assist businesses. These can
include wholesalers, retailers, commission agent, distributors, and logistics providers.
Understanding the relationships and dynamics with intermediaries is crucial for efficient and
effective distribution.
 Public: Publics refer to groups or individuals interested in or impacting the company’s
operations and performance. This includes the media, government agencies, local
communities, and special interest groups. Managing relationships and addressing different
public concerns is important for maintaining a positive reputation and minimizing negative
impacts.

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  Financial institutions: Financial institutions such as banks and investors play a crucial role
in providing capital and financial resources to businesses. Establishing good relationships
with financial institutions is important for obtaining funding, managing cash flow, and
supporting business growth.
b. Macro environment: The macro environment consists of general factors that the business
typically has no control over it. The success of the company depends on its ability to adapt to such
factors. These factors include the PESTEL model. These factors can either constitute an
opportunity of a threat to the business. The PESTEL factors include the following:
 Political factors: These factors are all about how and to what degree a government
intervenes in the economy or a certain industry. Basically all the influences that a
government has on the business could be classified here. This can include government
policy, political stability or instability, corruption, foreign trade policy, tax policy, labour
law, environmental law and trade restrictions. Furthermore, the government may have a
profound impact on a nation’s education system, infrastructure and health regulations. These
are all factors that need to be taken into account when assessing the attractiveness of a
potential market.
 Economic factors: Economic factors are determinants of a certain economy’s performance.
Factors include economic growth, exchange rates, inflation rates, interest rates, disposable
income of consumers and unemployment rates. These factors may have a direct or indirect
long term impact on a company, since it affects the purchasing power of consumers and
could possibly change demand/supply models in the economy. Consequently, it also affects
the way companies’ price their products and services.
 Socio cultural factors: Countries vary from one another. Each country has a distinctive
culture (mindset). This dimension of the general environment represents norms, customs and
values of the population within which the organization operates. This includes population
trends such as the population growth rate, education level, cultural implication, social
lifestyle, income distribution, career attitudes, safety emphasis, health consciousness and
cultural barriers. The study of the human population in relation to its size, density,
geography, gender, race, age, occupation, and other relevant demographics is known as
demography. People are the driving force for progress of any markets. The large and diverse
demographics offer both opportunities as well as challenges for businesses.

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 Technological factors: These factors pertain to innovations in technology that may affect the
operations of the industry and the market favorably or unfavorably. This refers to technology
incentives, the level of innovation, automation, research and development (R&D) activity,
technological change and the amount of technological awareness that a market possesses.
These factors may influence decisions to enter or not enter certain industries, to launch or not
launch certain products or to outsource production activities abroad. By knowing what is
going on technology-wise, managers may be able to prevent the company from spending a
lot of money on implementing or developing a technology that would become obsolete very
soon.
 Environmental (ecological factors): It refers to the physical environment or natural
resources that are needed by marketers as inputs or that are impacted by marketing activity.
As environmental concerns have intensified, the ecological conditions have become a
significant aspect to consider. Natural resources are found in the environment and are used
by the company as raw materials to make products. Environmental factors have come to the
forefront only relatively recently. They have become important due to the increasing scarcity
of raw materials, pollution targets and carbon footprint targets set by
governments. These factors include ecological and environmental aspects such as weather,
climate, environmental offsets and climate change which may especially affect industries
such as tourism, farming, agriculture and insurance. Furthermore, growing awareness of the
potential impacts of climate change is affecting how companies operate and the products they
offer. This has led to many companies getting more and more involved in practices such as
corporate social responsibility (CSR) and sustainability.
 Legal factors: legislatives changes take place from time to time. Many of these changes may
affect business. Although these factors may have some overlap with the political factors,
they include more specific laws such as: discrimination laws, antitrust laws, employment
laws, consumer protection laws, copyright and patent laws, and health and safety laws. It is

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 clear that companies need to know what is and what is not legal in order to trade successfully
and ethically. If an organization trades globally this becomes especially tricky since each
country has its own set of rules and regulations. In addition, managers want to be aware of
any potential changes in legislation and the impact it may have on your business in the
future. Recommended is to have a legal advisor or attorney to help you with such issues.
Self-assessments questions:

1. Differentiate between internal and external environment

2. Examine the components of a business environment
3. List elements of the internal environment of a business
4. Examine the micro environment of a business
5. Using the PESTEl model examine the macro environment of a business

REFERENCES/FURTHER READINGS

 Kotler Phillip (1999). Marketing Management, Analysis Planning and Control

Millennium Edition. India: Prentice Hall.
 Business Studies An Introduction to Management and Business Studies Oxford:
Heinemann.

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