A firm does not operate in a vacuum. There are various external elements that affect how a business operates. These elements can be social, economic and political. It is important that an organisation studies its environment in order to survive, grow and increase its profits.
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What is a Business Environment
A business environment consists of all the factors and institutions that may influence how a company operates. This includes the customers, the government, competitors, the laws and regulations as well as all social factors together with all other elements that may either negatively or positively affect a firm. Both external and internal elements are described below;
External Business Environment
The elements of the external business environment are popularly known by the mnemonic, PESTLE with each letter standing for Political, Economic, Social, Technological, Legal and Environmental. These 6 elements of the external business environment give a general overview of the business landscape. Analysing those 6 elements helps businesses understand the major external elements of a business environment that may affect them directly or indirectly, that way businesses can maximise on any available opportunities and work around any existing threats.
Political elements of a business environment are concerned with how the local government influences the business sector. The political environment affects the business sector in any country. Issues such as subsidies, tax, duty, fiscal and monetary policy can negatively or positively affect the companies in all industries. Social instability can have detrimental effects on all businesses.
Examples of Political elements
- The country’s constitution
- Prevailing political system
- The level of political morality
- A country’s political and ideology
- The extent and nature of government intervention in the business sector
- The relationship with the country and the rest of the world
- Political institutions and agencies
- Dominant ideologies and values of major political parties
Economic Factors (Macroeconomic)
Economic elements of the business environment can be divided into 2; macroeconomic elements and microeconomic elements. The external economic elements of the business environment are macroeconomic. The macroeconomic elements affect the whole country, these include exchange rates, interest rates, inflation and business confidence among other issues. These elements can determine the success and failure of many industries. For example, countries that have high inflation rates or weak exchange rates may find it hard to grow businesses, countries with low business confidence lack investment.
Other Macroeconomic elements;
- The structure of the economy with regard to the public and private sector
- The agricultural and manufacturing trends
- The physical Infrastructure
- The financial Infrastructure
- The economic system (Communist or Capitalists economy)
Economic Elements (Micro-economic)
This refers to the elements of the business environment that affect the internal business operations. Such elements are regarded as controllable. Microeconomic elements are elements directly related to the business. These are the customers, suppliers as well as a firm’s competitors.
- Customers/Demand for the product
Customers are an important element of the business environment. After all, a business cannot stay operational without customers. Customers determine whether or not there is a demand for the product and services being offered by businesses.
Another micro-economic factor that is an important element of a business environment is a firm’s competitors. Competitors affect a firm’s market share. They also determine the pricing of goods and services offered by the organisation. Companies that have little to no competitors can charge higher prices and make abnormal profits but if firms that have a lot of competitors attempt to do so, their profits will be competed away by firms that charge lower prices.
- Internal business environment
The internal business environment is an important element of a business environment. This includes the employees, the suppliers and managers. The customers of the business can also be included as part of the internal environment. These internal elements determine the day to day running of the organisation and therefore the success and growth of the firm.
Other Internal/Micro-economic elements
- The organisational structure of a firm
- The vision, mission and goals of an organisation
- The leadership styles
- Organisational culture
Social elements of a business environment are concerned with demographics, population size, and dominant cultural trends. Such elements affect the products and services that can be offered to consumers. For example, there are certain foods that are prohibited in some religions so specific kinds of foods can only be sold. In addition, consumer preferences are greatly influenced by culture and religious beliefs.
Examples of Social elements of a business environment
- Concerns with quality of life
- Life Expectancy
- Birth and death rates
- Levels of education and literacy rates
- Family composition and gender equality
Technological elements of a business environment refer to the prevalent technological trends. They can be beneficial or detrimental to the success or failure of an organisation. Scientific improvements for certain products and services help firms become more efficient. However, these technological advancements can threaten other businesses by replacing them with machinery and automation. For example, online stores replacing physical stores and automation replacing people.
Other elements of a business environment are legal factors. These are laws and regulations that govern how businesses should operate in a given country. For example, antitrust laws, consumer law, employment, health and safety laws among other regulations.
Environmental factors are other important elements of the business environment. These include climate change, weather conditions and environmental laws to do with conservation and pollution. Businesses especially mining and manufacturing companies are directly affected by environmental factors and regulations.