8 Elements Of The Business Environment

Updated Sep 22, 2022.
Elements Of The Business Environment

No business or firm can operate and succeed in isolation. Apart from the essential human resources needed for your business, external and internal environmental elements can affect your business’s operations.

Every organization needs to study its business environment to grow, gain a competitive advantage, and enjoy a rich return on investment (ROI). You need to know your micro-environment and other factors that directly or indirectly influence your business.

This article reveals eight major components of the business environment.

Let’s get started.

What is a Business Environment?

A business environment refers to all the factors, both internal and external, that have a hand in influencing how business operations are carried out.

Factors such as customers' needs and expectations, government intervention, competitors, laws and regulations, supply and demand, social and market trends, and economic changes make up the factors that define a business environment.

These factors directly or indirectly influence how business functions, and the total of all these factors can bring about a positive or negative change to a company or the business environment in which it exists.

The business environment and all the factors that define it are often outside the power and control of the business organization. Still, they have a massive hand in the performance of the business immensely.

As inconsequential as the business environment might seem, it can be the make and break of a business.

A proper understanding of the business environment benefits people in the industry. They conduct their operations alongside such factors to get the best out of the economic conditions they find themselves in.

Components of Business Environment
Source: Knecnotes

Elements of Business Environment

Elements or components of a business environment consist of the sum of all the factors that have a level of control, be it direct or indirect control over the activities of a business. 

Such business environment elements influence all businesses' internal and external environment under that geographical area.

Here are the eight essential elements of the business environment.

1. Political Environment

A political environment consists of political factors that describe how government policies and activities affect the business environment of that country. 

The political system affects the business environment of any country. External factors such as taxes and duties, fiscal and monetary policies, and subsidies are issues under the political environment that can impact businesses either positively or negatively. 

Political elements such as the country's political ideology, management relationship between the country and the rest of the world, level of political morality, and political institutions and agencies are all among the elements that define a political environment. 

Essentially, the political environment significantly impacts how people in business carry out their business activities. Before committing to your business under such a government, you must scan the political environment for favorable factors.

Essential Aspects of the Political Environment 

Here are some of the essential aspects of the political environment:

  • Country's constitution
  • Current political system
  • Government's foreign policies and interventions
  • Cultural values and value system of political parties and political leaders

Political Climate and Government Control and Stability

The political climate and the stability of governments are other factors that people in business need to consider in deciding on a country for their daily business activities.

Scrutinize the government's control over companies under their jurisdiction and the laws guiding their operations thoroughly to ensure it is a perfect fit for their companies.

How restrictive regulations are for foreign businesses, import tariffs, quotas, and export restrictions are among the criteria people in the industry are looking for in choosing a suitable business environment. 

Apart from the federal and state governments, the local government exerts its control over businesses. 

The responsibilities of the state and local governments often include issuing business licenses and corporate charters and imposing taxes to establish a political and legal environment for that area. 

2. Economic Environment

An economic environment consists of several economic factors that have a hand in the economic system of a geographical location and how a business unit under this location functions. 

The factors that influence an economic environment are usually a combination of the economic system, economic policies, trade cycle, economic resources, interest rates, inflation rate, employment, consumer income, capital structure, and several other factors. 

An economic environment is dynamic and complex as it allows for interactions between business firms and economic market conditions like demand and supply factors and the government's economic policies. 

Apart from how a business is expected to conduct its operations, the business environment also affects a company's growth. 

The economic system of a country, be it capitalism, socialism, or a mixed economy, all have unique reactions to changes in economic factors. 

The economic elements of a business environment can fall under either a macro environment or a microenvironment. 

Economic Environment
Source: StudiousGuy

Macroeconomic elements are external economic elements that affect the whole country's economy, including exchange rates, interest rates, inflation, agricultural and manufacturing trends, and financial institutions, among other external factors. 

On the other hand, micro factors of an economic environment consist of all the elements of a business environment that affect internal business operations. 

Unlike macro environment elements, microeconomic elements can be controlled by businesses as they are directly related to the company and include customers, suppliers, and the firm's competitors. 

Essential Aspects of the Economic Environment

Here are some of the essential aspects of an economic environment.

  • Role of the public and private sector
  • Balance of trade and payment
  • International debt
  • Savings and investment rate
  • Rate of growth of GDP, GNP, and Per Capita Income 
  • Money supply in the economy

Economic factors have an immediate impact on businesses. 

Every economic environment comes with unique opportunities and constraints. It is imperative for people in the industry to scan the economic environment of their desired strategic business location for the best fit for their companies. 

Economic Environment Components
Source: Owlgen

3. Social Environment

The social environment consists of social factors that highlight demographics, population size, and dominant cultural trends of that location that influence consumers' products and services. 

This environment depends on the customs and traditions of the larger society where the business exists and contributes significantly to its success or failure.  

A positive social environment encourages harmony, confidence, and stability and helps impact business performance and productivity by maximizing business opportunities and addressing their peculiar challenges. 

The social environment contrasts sharply with the natural environment. Unlike the natural environment, some social aspects of the larger social environment are similar in values, customs, and traditions. In contrast, others differ entirely across the same social factors. 

The social environment can be either internal or external, depending on businesses' control and the level of influence they have over these social factors. 

External Social Environment

An external social environment consists of factors beyond the control of the business. It can be seen in the society at large as it is a multicultural social environment with its unique and prevailing external social factors such as customs, traditions, and values. 

Internal Social Environment

The internal social environment is specific to the company. It includes beliefs, customs, behaviors, attitudes, practices, and values that they have direct control over in their internal environment.

Essential Aspects of the Social Environment

Here are some of the essential aspects of the social environment.

  • Quality of life
  • Literacy rate
  • Birth and death rates
  • Population
  • Consumption habits
  • Place of women in the workforce 
  • Traditions and customs of people 

As people in business, you cannot overlook the importance of the social environment despite their effect and influence being long-term. 

Social environment components do not immediately impact the business, but with time, companies reap the total rewards and benefits it has to offer them.

Social Environment - Effects of Social Environment on Business
Source: SketchBubble

4. Demographic Environment

A demographic environment is an element of the external environment that pertains to the human population of a country concerning demographic factors. 

These demographic factors include population size, education, sex ratio, age, occupation, income, wealth status, and marital status. They all serve as criteria for which businesses can study various components of the demographic environment in detail. 

Every country has its distinct demographic environment due to the differences in cultural values and the overall value system of that country. Demographic factors influence how a business operates to a large extent. 

A country with a large population would have a significant demand for goods and services than a country with a lower population. 

So a proper and detailed understanding of the demographic environment and the factors that influence it can have a favorable effect on your business if well utilized. 

Knowing the demographics of the population of an area helps businesses come up with variables that interest them as it affects their growth and success.

Demographic Segmentation
Source: QuestionPro

Demographic Characteristics and Factors

Every business has its unique demographic characteristics, and a demographic environment serves as an indicator of the amount of success your business can achieve. 

Apart from indicating how your business might perform in a place, demographic factors can help companies to determine how well their products or services will sell in a geographical location. 

In cases where a business wants to launch a new product or service in an unfamiliar environment, the demographics of that environment help the company conclude the general acceptability of the new products or services. 

Demographics and Decision Making

Demographics are at the center of all business decisions and are an uncontrollable factor in the business environment. 

Business managers must closely monitor demographics to give them a competitive edge as the business world is plagued with tremendous competition. 

5. Technological Environment

Technology is one of the areas of the business environment that has brought about changes in how a business operates in terms of the methods utilized for production and the quality of goods produced. 

With constant technological developments leading the charge, business firms need to be positioned to monitor and take advantage of the changes in the technical environment to benefit their businesses.  

The technological environment also dictates the speed at which progress is made in research and development in coming up with modern and more effective technologies in production.

Despite being capital intensive, technological developments provide a cost-effective alternative to traditional labor methods, as utilizing technology is key to growth and surviving in a competitive business environment.

Technological trends, whether prevailing or not, can either be beneficial or pose severe risks to the success of business strategies. 

Improving product or service processes and general environment can make your business more efficient. Technological innovation is the most popular innovation type.

Technology Innovation Cycle
Source: Walter Dorn

On the downside, technological advancements can pose significant risks to businesses as they can drive them entirely out of existence through machinery and automation. 

Famous examples are in the cases of the invention of online stores, which are systematically replacing physical stores, and automation carrying out tasks in place of a physical human being. 

Ultimately, the technological environment aims to influence business decisions by using new equipment and machinery to improve the quality of both the process and the production processes. 

Essential Aspects of the Technological Environment

Here are some of the essential aspects of a technological environment: 

  • Innovations and inventions
  • Developments in the IT sector
  • Import and export of technology
  • Scientific improvements

Understanding Technological Environment for Economic Growth

Under capitalism or other economic systems, utilizing technology to transform economic resources into products or services helps stimulate economic growth. 

Technology is the application of science and skills and knowledge gathered in engineering to develop practical solutions to production and business operational problems. It is one of a company's most valuable assets.

A nation's ability to build and maintain wealth depends mainly on its speed and effectiveness in developing new equipment, techniques, and software that improve productivity and decrease costs.

6. Legal Environment

Legal factors are external factors that influence a business environment, consisting of laws and regulations designed to govern how businesses conduct business activities in a country. 

Countries utilize common legal laws and regulations to govern business operations, including consumer, employment, safety, and antitrust laws. 

In a democratic system of government, the laws and legislation guiding a legal environment are passed in the parliament. Business owners are compelled by law to carry out their business activities with full regard and within the framework of the legal environment.

The Trade Mark Act, Essential Commodities Act, Consumer Protection Act, and Weights and Measures Act are among the prevalent legislations passed by various countries over time that aim to contain how business transactions are performed. 

A legal environment often seems to be a dictator as it has its unique constraints, which it mandates all businessmen to follow. 

Still, these laws and regulations also provide unique business opportunities and make the business relatively favorable for all parties, not just a select few. 

Here are some of the essential aspects of a legal environment.

  • Laws and Legislative Acts
  • Advertisements Laws
  • Foreign Exchange Regulation and Management Act
  • Legal Policies about Foreign Trade and Licensing
  • Statutory Warnings

The legal segment of a legal environment focuses on how the judiciary system influences the business activity of a country. An example is the case of intellectual property rights, which is a crucial aspect of the legal system for most businesses. 

Intellectual property piracy is an enormous threat to a business's profit outlook. Many countries have identified these threats and, under the legal environment of a company, have passed laws and set up agencies to combat this menace in the business environment.

7. Environmental Factors

Environmental factors are essential elements of an external business environment. They include climate change, weather conditions, and environmental laws affecting business operations.

These factors and regulations affect businesses dealing in mining and most manufacturing companies the heaviest blow as they directly affect how they conduct their business. 

Environmental factors are becoming increasingly important as the world becomes more environmentally conscious. 

Businesses must determine how their location and practices affect their surrounding environment and incorporate processes to preserve the environment into their business structure. 

In a general sense, environmental factors identify all the economic, political, technological, regulatory, and demographic environmental elements that affect how a company operates, grows, and survives in its business environment. 

Environmental factors in business can be categorized as internal or external, depending on the level of control they can afford. 

External Environmental Factors

External environmental factors consist of several factors outside a business unit that they do not have control over, including competition, socio-economic factors, external costs and benefits, and legal, ethical, technological, and political environments. 

Internal Environmental Factors

Internal environmental factors include all the unique components within a company that they have control over. They include the company’s leadership, employee strength, corporate culture, business strategy, and natural resources.

8. International Environment

An international environment is the surrounding where global companies conduct their business activities. 

As a manager, you must avail yourself of the factors that comprise the business environment you seek to penetrate. You identify threats and devise ways of combating these identified threats before giving the go-ahead for business activities to commence. 

The international environment and all its factors provide the platform for the global market of trading goods and services to flourish as it exists for the globalization of trade. 

An international environment exists as a dynamic business environment where foreign companies are allowed to carry out their business activities while contributing to the growth and development of the country. 

A company’s management relationship with the factors that constitute an international business environment is crucial as it directly affects the country’s economy. 

An international environment can be in the form of cross-border trading for a mixed economy, franchising, licensing, or a joint venture depending on the factors related to the business and the economic conditions provided.

Essential Aspects of the International Environment

Here are some essential aspects of the international environment.

  • Political stability
  • Corporate culture
  • Foreign exchange 
  • Legal and taxation
  • Fiscal policy

Understanding the International Business Environment

International managers are challenged to understand the foreign environment where they conduct their business activities. There would be cultural and environmental differences that they need to acclimate their business to for a successful outcome.  

The international business environment is multi-dimensional in that it involves various factors such as political risks, cultural differences, exchange risks, and legal and taxation issues. Managers must consider all these factors to get the best out of the country’s economy.  

As a crucial part of a country’s economy, the international business environment helps countries achieve significant growth and development as they set the standard for cross-border business transactions. 

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.