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.