BUSINESS ENVIRONMENT

The environment of a firm may be defines as the sum of

all the elements and forces present in its immediate and
remote surroundings, which have a potential impact on
its ability to achieve its objectives. A firm does not exist
in isolation. It works within the overall environment
and must keep up with changes in the environment.
Elements of the Business Environment

The environment of the firm can be divided into two: (1)

Internal environment (micro environment) and (2)
External environment (macro environment).
 
Internal Environment [Micro Environment]
The internal environment of business refers to all the
factors or forces that have a more direct impact on the
daily activities of the company. The main factors in the
internal environment are: customers, suppliers,
competitors, shareholders, financial institutions, and
employees.
Customers
According to Peter Drucker, “the ultimate aim of all business organization is to create a
customer” (The Practice of Management, p. 37). Customers exchange resources, usually in
the form of money, for an organization’s products and services. The customers expect the
management to provide them with quality products and services at reasonable prices which
allow appropriate rates of return to its owners. Management on the other hand, seeks to
win customers’ loyalty through factual information about their products which have been
designed and developed, keeping in view the customers’ expectations.
 
Suppliers
Suppliers refer to firms and individuals that provide the resources needed by the company
and its competitors to produce goods and services. Inferior or sub-standard quality of raw
materials or delayed supply of raw materials will hamper (obstruct) the production process
thereby increasing the cost of finished goods. Management must purchase quality raw
materials from reliable suppliers, and pay them properly when the money is due. The
enlightened management always prefers suppliers who are valuable sources of information
on future trends in the raw material market.
Competitors
These are companies that offer similar or alternative products and services. In
pursuit of survival and growth, organizations must compete with one another.
The presence of competition and rivalry forces each organization to offer quality
products at minimum prices. Therefore, to be successful, a company must
provide greater customer value and satisfaction than its competitors do.
Competition indeed brings out the best in an organization and requires the
management to constantly strive for excellence.
 
Shareholders
These are the owners of the firm who can influence the policies and procedures
of the firm. They do this by exercising their voting rights. Bearing in mind the
degree of the influence of shareholders, company directors and managers are
now becoming more conscious of the decisions they make and how they carry
out their responsibilities.
Financial Institutions
These include banks, insurance companies, and other financial
organizations. Firms depend on these financial organizations to
provide them with capital to carry out their business activities.
 
Employees
The organization’s labor force comprises of all the individuals
who are employed by the organization. Employees are
responsible for work in an organization. The firm must take care
of the needs of its employees by providing a work environment
that is conducive for them.
 People are the central resource of every organization.
Thus, organizational excellence begins with the
performance of their employees. It is their dedication
and commitment of organizational purposes that make
the difference. Whether organizational goals can be
achieved depends on the willingness of the people to
make the necessary contributions. The performance of
employees is a true benchmark (standard, or point of
reference) of organizational performance.
 
** Stakeholders **
Stakeholders are groups or individuals who are directly or
indirectly affected by an organization’s pursuit of its goals.
In essence, they are all the people who stand to gain or
lose by the policies and activities of a business. Generally,
there are internal and external stakeholders. Internal
Stakeholders—These include employees, shareholders and
board of directors. External Stakeholders—These include
customers, suppliers, competitors, financial institutions,
government, special interest groups, the media, labor
unions, etc.
 
External Environment [Macro Environment]
The external environment of a business refers to the major forces
outside the organization that have the potential to significantly
influence the success of the firm. They consist of primary forces
that shape opportunities and pose threats to the company. These
factors include: physical environment, political-legal, economic,
technological, socio-cultural and demographic factors.
 
Physical Environment
This includes the supply and availability of resources and raw
materials. Availability of resources affects the location of the
industries. Constraints in the physical environment determine
the type of business activities that are carried out.
Political—Legal Environment
This is the legal framework within which businesses operate. This comprises
the law and regulations that are passed by the government to control the
business activities. These laws act as guidelines within which the business
must operate.
 
Economic Environment
This includes all aspects that affect the economic growth and business
activities within the country. Business enterprises, being economic
institutions, are directly influenced by many economic factors/forces such as
the level of unemployment, the rate of growth of the economy, the level of
investment, the level of government and consumer spending, the inflation
rate, etc. These economic factors can affect the operation of a firm both on
the revenue side and the cost side
 Technological Environment

This refers to forces that create new technologies, creating

new products and market opportunities. Examples
include the Internet, biotechnology, cellular and mobile
services. Breakthrough in technology can affect a
business positively by allowing it to take advantage of
new methods of production and new materials for
manufacturing goods. The firm is also able to provide
better services to its clients, using current computer
technology.
Socio-Cultural and Demographic Environment
The social element of a county has an impact on the
business of a firm. The products and services that a firm
provides depend very much on the composition of the
population and its demographics, values and attitudes
that people have and the culture of the society. Whether
a product or service succeeds or fails is dependent on the
society’s customs and ways of life. The attitudes of the
society provide a framework within which an organization
operates.