Importance of Business Environment

Importance of Business Environment

A business environment, both internal and external, refers to the surrounding factors that influence business operations.  Businesses operate in an open system therefore political, economic, social and technological factors affect its day to day operations. It is therefore essential for businesses to study both the internal and external environments because they have a bearing on the organisation’s strengths, weaknesses, opportunities and threats. Which in turn affects a business’ growth and profit potential. This article outlines the important of business environment.

Table Of Contents

The Internal Business Environment

The internal business environment consists of factors within the organisation that can be controlled by management in most cases. These factors determine the strengths and weaknesses of an organisation. Some of these factors are outlined below;

The Organisational Culture

Also known as the value system, this includes the company’s vision, mission, goals and the customs shared by the members of the organisation. A company’s culture affects how employees interact with each other, with customers and has a direct effect on the strengths and weaknesses of the organisation.

Leadership style

A company’s leadership style has a direct bearing on a company’s performance. An autocratic management style tends to create a sense of mistrust between managers and subordinates. Authoritative leaders hardly inspire creativity. Leadership style is a critical factor in that the behaviour of leaders can positively or negatively affect an organisation’s culture. Many organisations provide their company’s direction, structure and leadership style through their mission and value statements.  Also, leadership has a direct bearing on employees’ attitude and morale.

Mission and Objectives

This clarifies the priorities of organisations whilst guiding employees towards achieving company goals. The company’s mission and objectives are included in the business philosophy, policy and development plan.  A company’s mission and objectives help clarify the direction of a company.

Management Structure and Nature

This refers to the way an organisation’s hierarchy is set up. This also shows how tasks and responsibilities are organised as well as how leaders and subordinates relate to each other. The composition of board directors, how employees relate to management and the degree of professionalism of management affect business decisions. Some structures delay decision making while others are more flexible and quicker in decision making.

Human Resources

The quality, skills and attitudes of employees affect the performance of an organisation. A demotivated labour force performs poorly. Incompetent employees weaken the organisation. Quality employees improve efficiency and are a force in growing a business.

The External Business Environment

The external business environment consists of external factors that are out of management’s control. These factors determine the opportunities and threats of an organisation.

Political Factors

Government activities and political conditions can influence business performance. Laws, regulations and social instability can negatively affect business confidence.  Countries that are at war have little to no business investment.

Economic Factors

Economic factors are either macro-economic or micro-economic. Macro-economic factors affect the entire business community. Examples include exchange rates, interest rates, business confidence and the level of inflation among other factors. Micro-economic factors are factors that affect a specific industry or a single business. The availability of suppliers, competitors, customers and public institutions are examples of such factors. Customers are an especially important element in the micro-economic environment. Businesses should give special attention to their customers. After all, the primary objective of any business is to attract and retain customers. Without customers there is no business. Therefore, monitoring changing customer preferences should be a prerequisite for any organisation. Due to globalisation the customer environment is becoming global together with competition. This presents opportunities for expansion at the same time, it exposes companies to the risk of being overtaken by ‘global competitors’. Both macro-economic and micro-economic factors determine the growth and profitability of a company.

Social Factors

Religious and cultural beliefs affect businesses. Consumer preferences are influenced by beliefs and culture. Different cultures have different food preferences and dressing patterns. The education level or literacy rate of a target market may affect how certain products perform. Changes in the social environment have an effect on the demand for specific products and services.

Technological Factors

Scientific improvements for given products and services together with new methods help companies become more efficient. The use and upgrading of machinery can positively affect productivity and reduce labour costs. However, technological advancements that present opportunities for some businesses can threaten others.  For example, online shopping is a huge threat to shopping malls and boutiques, digital watches have replaced traditional ones and mobile phones have completely taken most landline customers.

Environmental Scanning

For a business to function optimally it is imperative to analyse the internal and external environment. There is a need to continuously update information regarding markets, customers, changes in regulations and government policies that directly affect the organisation’s industry. Such an external environmental scan is useful for operational and strategic management. Looking out for unforeseen developments that may affect the business is crucial for the survival and growth of an organisation. A company can scan the business environment in various ways.

Techniques for Environmental Analysis

SWOT Analysis

SWOT stands for strengths, weaknesses opportunities and threats. Assessing them with regards to finance, skills and competition among other factors should be done regularly. Strengths and weaknesses are normally internal whilst opportunities and threats are external.  A SWOT analysis can help an organisation address pressing issues that may hinder growth and development. Also, a SWOT analysis can assist an organisation in discovering its competitive advantage.

QUEST Analysis

QUEST stands for quick environmental scanning techniques. This is a 4-step process which includes the following

  1. Observing and Identifying the major trends in an Industry
  2. Speculating issues that may affect the organisation
  3. Preparing a report containing summary findings with their implications
  4. Reviewing the report and developing feasible strategic options
PESTLE Analysis

This involves identifying political, economic, social, technological, legal and environmental factors that are likely to affect a business. A PESTLE analysis should be done before a SWOT analysis.

Business Environmental Scanning Challenges

Some of the challenges faced by businesses in conducting environmental scans include;

  • Information overload
  • There is too much information to be dealt with and this can be overwhelming for businesses
  • Missing Information
  • There are situations where the relevant information is not readily available, or it may be costly to obtain.
  • Ever changing Business Environment
  • A business environment is dynamic
  • There is need to continuously update information
  • Technology is progressing at a fast pace

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