It would be impossible for any business to exist in a vacuum, so, because every business should be strategically located in a physical or virtual space and structured to allow for maximumprofit as its environment determines, it is highly important to seek to understand the power of business environments and how they can affect your business.
The term ‘business environment’ points to the collective sum of conditions, forces and influences that affect a business. According to Professor Keith Davis, author of ‘Business and its Environment,’ “Business environment is an aggregate of all conditions, events and influences that surround and affect it. It is broad and ever changing as its separate elements interact. A single firm’s environment is narrow in scope than the total environment of business. It is complicated and continuously changing.”
For a business to exist depends on certain internal and external factors. These factors are treated as a given, and business enterprises are expected to operate under a particular set of environmental systems. Each of these factors creates a unique set of challenges and opportunities for businesses.
The internal business environment comprises of factors within the company which impact the success and approach of operations. The most commonly discussed are:
– Finances
– Organizational structure
– Operational structure
– Company culture
– Human resources
– Strategic risks
– Innovation
Meanwhile, the external business environment consists of economic, political and legal, demographic, social, competitive, global, and technological sectors or activities. Let’s take a closer look at each.
Economic Environment
According to the bank for Canadian entrepreneurs, economic environment refers to all the external economic factors that influence buying habits of consumers and businesses, and therefore affect the performance of a company. These factors are often beyond a company’s control and may be either large-scale (macro) or small-scale (micro), such as: employment/unemployment status, per capita income, etc.
Demographic Environment
Demographic factors are powerful factors in the business environment and as such are of utmost importance to business owners. Demography is the study of people’s vital statistics, such as their age, gender, race and ethnicity, and location. Demographics help companies define the markets for their products and also determine the size and composition of their workforce. The demographic environment includes such factors as age distributions, births, deaths, immigration, marital status, gender, education, religious affiliations, and geographic dispersion —characteristics that are often used for segmentation purposes.
Political/Legal Environment
The political climate of a country is another critical factor for managers to consider in day-to-day business operations. The amount of government activity, the types of laws it passes, and the general political stability of a government are three components of political climate.
Competitive Environment
How do businesses stay competitive and still maintain a level of profitability that allows them to be successful? The competitive environment has intensified with the development of new technologies, the opening up of foreign markets, and the rise of consumer expectations.
Technological Environment
The application of technology can stimulate growth under capitalism, or any other economic system. In this context, technology is the application of science and engineering skills and knowledge to solve production and organizational problems. New equipment and software that improve productivity and reduce costs can be among a company’s most valuable assets. Productivity is the amount of goods and services one worker can produce. Your ability as an organization to maintain and build wealth depends in large part on the speed and effectiveness with which you use technology to invent and adapt more efficient equipment to improve production productivity, to develop new products, and to process information and make it instantly available across the organization and to suppliers and customers.
Social Environment
Social factors—our attitudes, values, ethics, and lifestyles—influence what, how, where, and when people purchase products or services. They are difficult to predict, define, and measure because they can be very subjective. They also change as people move through different life stages. People of all ages have a broader range of interests, defying traditional consumer profiles.
They also experience a “poverty of time” and seek ways to gain more control over their time. Changing roles have brought more women into the workforce. This development is increasing family incomes, heightening demand for time-saving goods and services, changing family shopping patterns, and impacting individuals’ ability to achieve a work-life balance.
Global Environment
From a business perspective, it is a small world, and it’s only getting smaller. Free trade among nations has allowed goods and services to flow across international borders more efficiently and cheaply. Formal trade agreements among nations have forged unprecedented links and interdependencies among economies. Look at the items on your desk and you may see items from China, Mexico, Canada, or Japan, to name a few.
