 Describe in detail different environmental factors affecting businesses.

Introduction of business environment:

Business is an important institution in society. Be it for the supply of goods or services, creation
of employment opportunities, offer of better quality life, or contribution to the economic growth
of a country, the role of business is crucial. A Business is nothing more than a person or group of
persons properly organized to produce or distribute goods or services. The study of business is
the study of activities involved in the production or distribution of goods and services-buying,
selling, financing, personnel and the like. Thus, business can be accurately defined by K.
Ashwathapa as “Complex field of commerce and industry in which goods and services are created
and distributed in the hope of profit within a framework of laws and regulations”[ CITATION
JNU13 \l 1033 ].

Business Environment is the most important aspect of any business. The forces which
constitute the business environment are its suppliers, competitors, media, government,
customers, economic conditions, investors and multiple other institutions working
externally. Defining Business Environment, The sum total of all individuals, institutions
and other forces that are outside the control of a business enterprise but the business
still depends upon them as they affect the overall performance and sustainability of the
business.[CITATION Top19 \l 1033 ]
Environmental factors can be explained as identifiable elements within the cultural,
economic, demographic, physical, technological or political environment which impacts
the growth, operations and survival of an organization. Environmental factors can be
both internal as well external for the business. External factors can include economic and
technological factors whereas; internal factors may include value system, objectives or
internal relationships of a business
Every business, whether large or small, is affected not only from internal organizational
factors but, from several external factors. Company have no control on external
environment. Developing marketing strategies should include considering environmental
factors so an accurate picture of the market trends and environment can be presented and
to understand as to where the company is standing. Ignoring environmental aspects is
similar to walking on a path where there are unsuccessful marketing and lost revenues which
can ultimately impact the health of the business brand [ CITATION Far18 \l 1033 ].

According to Shawn Grimsley (2013): “the sum total of all external and internal factors
that influences a business. You should keep in mind that external factors and internal
factors can influence each other and work together to affect a business.”

According to Keith Davis (2002):”the aggregate of all conditions, events and

influences that surround and affect it.”

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 According to A. Harrison (2016):”the external political, economic, legal,
technological, ethical, and other factors which affect an organization.”

Importance of business environment:

On the basis of the foregoing discussion, it can be said that the Business Environment is the
most important aspect of any business. To be aware of the ongoing changes, not only helps
the business to adapt to these changes but also to use them as opportunities. Business
Environment presents threats as well as opportunities for any business. A good business
manager not only identifies and evaluates the environment but also reacts to these external
forces. The importance of the business environment can be neatly understood if we consider
the following facts:
 Enables to Identify Business Opportunities:
All changes are not negative. If understood and evaluated them, they can be the reason for
the success of a business. It is very necessary to identify a change and use it as a tool to
solve the problems of the business or populous.

 Helps in Tapping Useful Resources:

Careful scanning of the Business Environment helps in tapping the useful resources required
for the business. It helps the firm to track these resources and convert them into goods
and services.

 Coping with Changes:

The business must be aware of the ongoing changes in the business environment, whether
it be changes in customer requirements, emerging trends, new government policies,
technological changes. If the business is aware of these regular changes then it can bring
about a response to deal with those changes.

 Helps in Improving Performance:

Enterprises that are thoroughly scanning their environment not only deal with the changes
presented but also flourish with them. Adapting to the external forces help the business to
improve the performance and survive in the market.
[ CITATION Top19 \l 1033 ]

Features of business environment:

The major features of business environment are as follows:

 Environment is inseparable part of business:

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 Environment is an integral part of any business. Business cannot work without
environment. Business requires good framework of legal, political, social, cultural and
economic factors. Both business and environment have influence over each other.

They share a symbiotic relationship. Success of the business lies in understanding the
environmental changes and adapting the business policies accordingly. There is a
mutual interdependence between business and its environment. Business
enterprises continuously interacts with its environment for taking inputs like raw
materials, capital, labor, energy etc. and transform them into goods and services and
then send them back to the environment.
 Environment is complex:
In the Business Environment, there are numerous complex situations in which one must
understand in order to maximize the benefits of success. Modern business is more complex,
flexible and highly un-predictable. The modern business has grown in size and scope and so
is the environment. Any change in the environment can adversely affect the business
organization. Business environment is growing extremely complex due to government
interventions and social consciousness.
 Environment is multifaceted:
Any change in the environment is followed by a chain of positive and negative reactions. A
change may be favorable to someone and unfavorable to others. Changes in the
environment can be perceived differently by different entrepreneurs. Environmental
changes may bring opportunities to some people and obstacles to others.
 Opportunities and obstacles:
Business environment is flexible. It keeps on changing. Sometimes it may provide
opportunities to the business, whereas on the other hand may create new challenges and
obstacles in the working of the organization. Opportunities may prove favorable to the firm
and obstacles may create threat and unfavorable to the firm affecting its growth and
profitability. Opportunities for growth and expansion is created when the environment is
favorable, on the other hand it creates problems and obstacles when it is unfavorable.
 Uncertainty:
Business environment is largely uncertain, as it is very difficult to predict future happenings,
especially when environmental changes take place too frequently. The enterprises must
continuously monitor their environment and adopt suitable business practices not only
improve their present performance but also continue to succeed in the market for a longer
period. [ CITATION Kum19 \l 1033 ]

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 Environmental factors affecting business:
Organizational environment denotes internal and external environmental factors influencing
organizational activates and decision making.
1. Internal Environments
Forces or conditions or surroundings within the boundary of the organization are the
elements of the internal environment of the organization.

The internal environment generally consists of those elements that exist within or inside
the organization such as physical resources, financial resources, human resources,
information resources, technological resources, organization’s goodwill, corporate
culture and the like. Some of these are tangible, such as the physical facilities, the plant
capacity technology, proprietary technology or know-how; some are intangible, such as
information processing and communication capabilities, reward and task structure,
performance expectations, power structure management capability and dynamics of the
organization’s culture.

Owners and Shareholders

Board of Directors

Employees Elements of Internal

Environment
Organizational Culture

Resources of the organization

Organization’s image/goodwill
 Owners and Shareholders:
Owners are people who invested in the company and have property rights and claims on the
organization. Owners can be an individual or group of persons who started the company; or
who bought a share of the company in the share market.

Owners of an organization may be an individual in the case of sole proprietorship business,

partners in a partnership firm, shareholders or stockholders in a limited company or
members in a cooperative society. In public enterprises, the government of the country is
the owner.

Whoever the owners, they are an integral part of the organization’s internal environment.
Owners play an important role in influencing the affairs of the business. This is the reason
why managers should take more care of the owners of their organizations.

 Board of Directors:

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 The board of directors is the governing body of the company who is elected by stockholders,
and they are given the responsibility for overseeing a firm’s top managers such as the
general manager.

 Employees:
Employees or the workforce, the most important element of an organization’s internal
environment, which performs the tasks of the administration. Individual employees and also
the labor unions they join are important parts of the internal environment.
If managed properly they can positively change the organization’s policy. But ill-management
of the workforce could lead to a catastrophic situation for the company.

 Organizational Culture:
Organizational culture is the collective behavior of members of an organization and the
values, visions, beliefs, habits that they attach to their actions.
An organization’s culture plays a major role in shaping its success because the culture is an
important determinant of how well their organization will perform.
As the foundation of the organization’s internal environment, it plays a major role in shaping
managerial behavior.

 Resources of the Organization:

An organization s resources can be discussed under five broad heads: physical resources,
human resources; financial resources, informational resources, and technological resources.
Physical resources include land and buildings, warehouses, all kinds of materials, equipment
and machinery.

 Organization’s image/goodwill:
The reputation of an organization is a very valuable intangible asset. High reputation or
goodwill develops a favorable image of the organization in the minds of the public (so to say,
in the minds of the customers). [ CITATION Ied19 \l 1033 ]

2. External Environments:
Factors outside or organization are the elements of the external environment. The
organization has no control over how the external environment elements will shape up.

The external environment can be subdivided into 2 layers;

a. General Environment:

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 Political Factors:
The political factors of the general environment refer to the business-government
relationship and the overall political situation of a country.
A good business-government relationship is essential to the economy and most
importantly for the business.
The government of a country intervenes in the national economy through setting
policies/rules for business. In our country, we see many such policies – import policy,
export policy, taxation policy, investment policy, drug policy, competition policy,
consumer protection policy, etc.
Sometimes, the government pursues a nationalization policy for state ownership of a
business.

 Economic Factors:
The economic factor of an organization is the overall status if the economic system in
which the organization operates. The important economic factors for business are
inflation, interest rates, and unemployment.
These factors of the economy always affect the demand for products. During inflation,
the company pays more for its resources and to cover the higher costs for it, they raise
commodity prices.
When interest rates are high, customers are less willing to borrow money and the
company itself must pay more when it borrows. When unemployment is high, the
company can be very selective about who it hires, but customers’ buying power is low as
fewer people are working.

 Socio-Cultural Factors:

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Customs, mores, values and demographic characteristics of the society in which the
organization operates are what made up the socio-cultural factors of the general
environment.
The socio-cultural dimension must be well studied by a manager. It indicates the product,
services, and standards of conduct that society is likely to value and appreciate. The
standard of business conduct varies from culture to culture and so does the taste and
necessity of products and services.
Socio-cultural forces include culture, lifestyle changes, social mobility, attitudes towards
technology, and people’s values, opinion, beliefs, etc.

 Technological Factors:
It denotes to the methods available for converting resources into products or services.
Managers must be careful about the technological factor. Investment decisions must be
accurate in new technologies and they must be adaptable to them.
Technological factors include information technology, the Internet, biotechnology, global
transfer of technology and so forth. None can deny the fact that the pace of change in
these technological dimensions is extremely fast.
Technological changes substantially affect a firm’s operations in many ways. The
advancement of industrialization in any Country depends mostly on the technological
environment. Technology has major impacts on product development, manufacturing
efficiencies, and potential competition.

 Legal Factors:
The legal environment consists of laws and regulatory frameworks in a country. Many
laws regulate the business operations of enterprises such as the Factories Act, Industrial
Relations Ordinance, the Contract Act, and the Company law, just to name a few.
Business laws primarily protect companies from unfair competition and also protect
consumers from unfair business practices.
Business laws also protect society at large. The laws regarding a merger, acquisitions,
industry regulation, employment conditions, unionization, workmen’s compensation and
the like affect a firm’s strategy. Even globalization has caused significant repercussions in
the legal environment.

 International Factors:
Virtually every organization is affected by international factors. It refers to the degree to
which an organization is involved in or affected by businesses in other countries.

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 Global society concept has brought all the nation together and modern network of
communication and transportation technology, almost every part of the world is
connected.

b. Task Environment:

 Suppliers:
Suppliers are the providers of production or service materials. Dealing with suppliers is
an important task of management.
A good relationship between the organization and the suppliers is important for an
organization to keep a steady following of quality input materials.
Suppliers are sources of resources such as raw materials, components, equipment,
financial support, services, and office Supplies.

 Customers & Buyers:

“Satisfaction of customer”- the primary goal of every organization. The customer is who
pays money for the organization’s product or services. They are the peoples who hand
them the profit that the companies are targeting.
Managers should pay close attention to the customers’ dimension of the task
environment because its customers purchase that keeps a company alive and sound.
Strategy managers must understand the composition of the company’s customers

 Competitors & New Entrants:

Policies of the organization are often influenced by the competitors.
Competitive marketplace companies are always trying to stay and go further ahead of
their competitors. In the current world economy, competition and competitors in all
respects have increased tremendously.
A firm needs to analyze the competitive intensity in the industry. It needs to understand
the competitive position in the industry to improve its chance of designing winning
strategies.

 Substitute Products:
The producers of substitute products are indirect competitors.
Substitute products serve the same categories of customers. They can meet the similar needs
of customers, and therefore, emerge, as threats.

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 Regulators:
Regulators are units in the task environment that have the authority to control, regulate
or influence an organization’s policies and practices.
Government agencies are the main player in the environment and interest groups are
created by its members to attempt to influence organizations as well as the government.
Trade unions and the chamber of commerce are common examples of an interest group.
[ CITATION Ied19 \l 1033 ]

CONCLUSION
In conclusion, there is a bunch of contributing factors the success of the company
which comes from both outside and inside a business. Either outside or inside factors
are of utmost importance for the development of the company. If a business hopes
to perform smoothly and successfully, they need to take all these elements into
consideration before making any decision.

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