Business Environment: Meaning, Characteristics, and Importance

Updated Oct 14, 2022.
Business Environment

The business environment is integral in determining whether your business will succeed. Just as the environment is vital to the growth and productivity of humans, so is the business environment important to a business.

The world itself keeps evolving, and the implication of this is a consistent change in the environment for businesses across the globe.

Any business that fails to conform to the new environmental development in the business world will struggle to succeed in highly-competitive market conditions.

This article discusses the business environment's role in the success or failure of businesses.

Let’s get started.

Meaning of Business Environment

A business environment refers to the social, economic, institutional, and political conditions under which you conduct business operations.

When you think of a business environment, think of it as the internal factors and external forces that affect a business's productivity and efficiency. These factors can be internal or external, but they are what business firms depend on to survive.

Components of Business Environment
Source: Knecnotes

No business grows in isolation. Apart from its internal factors, businesses depend on external factors such as market and sales, government policies, societal values, competition, customers, production cost, business strategies, tax, and others.

Business environments are ever-changing and dynamic. Hence they can not be controlled by business organizations. Just as human beings learn to survive in different environments, business enterprises must learn to stay within their environment.

Certain businesses succeed not because they have a better idea than the rest but because they interact with their environment better. If a business firm fails to follow industry trends, it will lose relevance.

The ability of an enterprise or business firm to predict, recognize and prepare for a change in its environment makes it successful. Understanding the unique characteristics of a business environment is the duty of every business manager and their team.

Areas of the Business Environment
Source: Researchgate

Characteristics of Business Environment

The business environment has its salient features. Every business manager willing to effectively interact with their business environment must properly understand its features for outstanding business success.

1. Complex

Complexity is a significant characteristic of the business environment. Since the business environment comprises many factors, a sudden change in a business enterprise sometimes cannot be traced to one aspect.

A business's overall performance summarizes all the environmental factors' inputs and effects.

2. Dynamic

Due to the influence of its many factors, the business environment is ever-changing. It is dynamic.

A good business has a flexible structure to suit its changing environment. Business organizations and their management should be strategic in their business approach.

The business owner has to regularly study internal and external factors to take advantage of the changing business environment.

3. Uncertainty

Have you ever wondered why business professionals make predictions? It is because the business environment is uncertain. Only forecasts can help you prepare for future events.

4. Multifaceted

The business environment is multifaceted. Its factors are interconnected, so several factors can cause a single change in business. For instance, companies may experience low sales if new competition arises; this also means changing customer preferences.

Likewise, if a country's policies encourage the influx of investors, more businesses will spring up. Another implication of this is an increase in competition.

The geographical location of a business can also determine its sales. If a company is close to its customers, it will be easier to make sales, but the geographical area may not be advantageous when it is far.

However, good leverage on technology will help the business to reach its customers irrespective.

5. Far-Reaching Impact

Since business environments are what the business depends on to survive, it is only natural for them to have a significant effect on the company.

Any slight change in a business environment will ripple impact on the business. The difference in government policy can either work for or against a business.

For instance, if the British government bans the importation of certain cosmetics, this will hurt concerned businesses in the country. It can ultimately lead to the shutting down of companies in the beauty industry.

6. Relativity

A business environment differs from place to place. It is affected by the local conditions and situations in which the business is set up. Just as the business policies in the U.S.A differ from those in Kenya, so will the business environment.

The relative concept encompasses the government, society, culture, customers, geography, competition, economic conditions, and other factors in a particular environment. They determine the success and struggles of a business in that location.

For example, Ghana may have a high demand for traditional wear, while the demand in the United Kingdom is not static.

Also, consumers' preference shift from soft drinks to wine will be seen as an opportunity for wine companies while it will be considered a threat for soft drink companies.

Importance of Business Environment

We can not overlook the importance of a business environment to a business because a business's survival is embedded in its environment. The business environment is a compelling force for business performance and longevity.

1. Helps Businesses to Recognize Opportunities

Knowledge about the business environment positions a business enterprise to identify opportunities for change. A good business manager will always look out for the positive side of any change in the business environment.

The first mover advantage is a business concept that highlights the advantages of maximizing early opportunities or losing them to your competitors.

An increase in competition will pose an opportunity to improve the enterprise product. At the same time, changing a country's government policy means it is time to expand to another country.

When introducing new technology, the concern is how it will benefit the business, reduce production costs, and increase sales.

2. Improves Your Business Performance

The business environment helps businesses to improve their performance and allows for continuous learning.

Outstanding businesses have mastered the principle of evolving with their environment. It is easier for a company to grow when its management is conscious of the relevant changes in its environment.

Business performance can grow tremendously if the staff takes advantage of its environment. For instance, the effective use of technology is helping small businesses access the global community on social media.

Social media marketers use online traffic to sell their products. There has been a drastic growth in Facebook marketing, Instagram marketing, and even WhatsApp marketing recently.

Any small business enterprise taking advantage of this development will make more sales than people selling in a physical store.

3. Recognizes Threats and Warning Signals

Aside from recognizing opportunities, a good mastery of the business environment helps the business management to identify a possible threat and deal with it beforehand or, in unavoidable cases, prepare for it.

The business owner should handle the identified threat proactively to avoid losing the advantage. After dealing with specific issues for a long time, it becomes easier to recognize the early warning signals quickly and make predictions of what can likely happen.

For example, a new multinational company entering a new country will serve as a warning signal for old and new firms in that country with lesser resources.

4. Assists in Planning

Planning is an important activity for a business. Accessing the future environment and the effect of future environmental conditions is crucial.

The problems a business environment poses help the business enterprise plan for the future. In their attempt to solve the problem, they acquire knowledge on how to tackle likely issues in the future and develop new ways to move their business forward.

With the knowledge of your business environment, setting realistic plans and ensuring the effective implementation of these plans is easier.

5. Helps to Tap Useful Resources

The business environment helps enterprises tap valuable resources such as labor, capital, market, and raw materials. Environmental analysis helps business managers to recognize the needed resources, acquire them, and put them into practical use.

A good business enterprise must be able to convert the resources in its business environment into goods and services.

Environmental analysis leads to organizational growth and long term survival
Source: Iedunote

6. Helps with Coping with Changes

Business changes are not necessarily bad. A proper understanding of change will help a business significantly.

The business environment builds a business enterprise and its management's ability to cope with change. A change in consumer behavior, government policy, technology, investors, and various factors will only help a business to diversify and grow.

Any business that survives through various changes will only become more assertive and knowledgeable in embracing the wind of change.

The environment helps businesses cope with rapid changes, more demanding customers, new technologies, and fragmented markets. Eliminating procedural delays and faster decision-making is essential.

Relationship Between an Organization and Its Environment

Different organizations interact with their environment differently. No organization operates the same way and manner.

Since business depends on the environment to function, it has to develop a close and continuous interaction with its environment. Businesses’ corporate cultures, demands, and objectives differ.

Therefore, an organization relates to the environment based on parameters like the business age, corporate culture, nature of ownership, size, and management.

However, the focus of the interaction is exchange. The exchange occurs in the exchange of information, resources, influence, and power.

External Environment
Source: Vendor-cnx

1. Exchange of Information

An organization gathers information from its environment through surveys, customer reviews, and research to improve productivity.

This information includes technological advancements, changes in customer preference, rise or fall in raw material cost, availability of workforce, social changes, and demographic factors.

Organizations use this information in determining the following steps to take.

  • What to produce
  • What quantity and quality to produce
  • How to market
  • How much return should be expected

Aside from gathering information, organizations also give out information as regards their sales and requests for human resources, such as employment. They should engage with new technologies.

The organization has to exchange information with the market for sales and delivery of output (product and services) to customers.

2. Exchange of Resources

An excellent environmental understanding positions the organization to interact dynamically with its environment. Such interaction with the environment entails an organization's ability to recognize a problem within its territory and take up the responsibility to solve it.

Although a business depends on its environment, the environment also benefits from the business output. For instance, the environment provides Coca-Cola with resources and a workforce. In exchange, the organization produces soft drinks for human consumption.

3. Exchange of Influence and Power

The business environment has considerable power and influence over the business organization. In most cases, it influences organizational decisions, changes business manners, and even affects sales.

For instance, the constant increase in petroleum prices in developing countries significantly impacts businesses in those countries.

However, in some instances, organizations that are well positioned can affect their environment. Such business operations can cause a change in the background.

In the case of staffing, if an organization decides to lay off some of its workers, it will increase the unemployment rate in the country. This layoff will affect its customers, workers, and government.

Therefore, the organization relates to the environment regarding power and influence exchange.

Components of Business Environment

As the physical environment comprises different components, so is the business environment. The business environment is made of various components. They can be classified into two, namely, the internal and external environment.

1. The Internal Environment

A business's internal environment has to do with the factors within the organization's boundaries. It is the sum of internal factors that directly affect the business enterprise.

The firm majorly controls these factors. They are flexible to change and can be modified to suit the business's needs at any time.

Internal Environment Factors
Source: Batheories

The internal environment can also be called the company environment. It includes;

Value System

A value system is the basic structure of a business organization, and everyone within this structure is expected to be guided by it. It includes the company's rules, cultures, policies, and norms.

Human Resources

Human resources refer to the staffing within an organization.

Organizational Structure

An organizational structure refers to all the structures put in place to see to the effective running of the organization. They are usually formulated from the company's vision and mission statement.

Vision and Mission Statements and Objectives

A company's vision statement talks about where the company is headed and the future. The mission statement answers the what and why, the business, and why the company is necessary.

Difference between Mission and Vision Statement
Source: Upraise

A business objective refers to the organization's ultimate aim and how it will get there. Together, they significantly impact the business by defining the company and determining how it will function.

Physical Resources and Technological Capabilities

They are a company's physical assets, like computers, factory machines, electronic devices, and others. Likewise, the company's technical know-how is essential to its functional and effective running.

Corporate Culture

The corporate culture is the behavioral strategy of a company, a set of beliefs, values, and a full mode of existence within the business enterprise. It dictates how the staff relates, how information is communicated, and how work is delivered within an organization.

A great corporate culture includes how the enterprise handles its external relations.

2. The External Environment

External business environments refer to all the external forces a business depends on.

In other words, they are the factors that a business depends on outside the confines of the enterprise to thrive. These factors are not within the firm's control, but they affect the company directly or indirectly.

The external business environment is broad. However, we will discuss it in two categories for practical discussion.

Micro Environment

Micro environment refers to the primary peripheral environmental factors that affect business performance. They are the suppliers, customers, competitors, stakeholders, and media.

  • Suppliers: The firm's suppliers have a direct influence on the business. Failure to deliver the required physical resource may lead to production delays. In the end, the uncertainty may lead to a drop in sales or loss of customers.
  • Customers: Customers influence business profitability. If a product is out of demand, producers modify or change it. A change in customers' buying patterns hurts or improves business.
  • Competitors: When a business environment is carefully engaged, competition can positively impact the business. Your competitors' strategies can be a positive environment for a business to grow. However, failure to update its strategies to suit the competition will affect the business. Irrespective of how organizations compete, it remains an environment for businesses to thrive.
  • Stakeholders: Stakeholders are individuals and corporate bodies with a financial commitment to the company. Examples of stakeholders include investors and creditors. They affect individual enterprises directly and indirectly in their day-to-day business operations.

Macro Environment

The macro environment is the environmental factor outside the confines of a business enterprise, but it affects the business strategies, performance, productivity, and profitability.

Factors under this category include:

  • Economic Environment: The economic environment refers to the nature of the financial activities within the country, state, or city where the business is situated. It is crucial to a business because it influences the real purchasing power of its customers. A buoyant economy means progress for the business, while a redundant economy spells doom for the company.
  • Political Environment: The political environment refers to governmental policies such as fiscal policies, necessary bans, and interest rates that affect businesses.
  • Physical Environment: The physical environment is the geographical location in which a business is situated. It is imperative to a business's overall performance.
  • Socio-Economic Environment: A change in consumer preferences, demographics, and lifestyle can affect a business.
  • Technological Environment: The technological environment includes all technological changes that can improve a business's delivery and profitability. Introducing new technology can mean progress for a company while it spells doom for another. For example, Maruti Suzuki India Ltd. dominated the small car market with mid-segment cars in India because they understood their business environment. With rising petroleum prices in India and a rapidly-growing middle-class population, Suzuki developed low-maintenance and mileage cars for small families. They increased their car production to make faster delivery.
  • Global Environment: The global environment is the worldwide market and workspace for the business. All changes will affect the business workspace. Many companies experienced poor business results during the Covid-19 pandemic. Only those who worked remotely could keep their businesses going.

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Martin Luenendonk

Editor at FounderJar

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.