Concept

A business environment is all the components that affect a business. These

include both internal factors, like employees and resources, and external
factors, like customers and markets. Each of these contributes to a
company's working environment and can influence how the business
functions.
It refers to the institution or forces that affect the business organization's
performance.
It is set of all conditions and events that are directly or indirectly related to
the operation and development of a business
Keith Davis- "Business environment is the aggregate of all conditions,-
events and influences that surrounds and affect business."
It refers to the set of all business conditions that have direct or indirect
bearing on the growth and development of a business organization.

Relationship between Business System and Business

Environment
A system is an organized and purposeful structure that consists of
interrelated and interdependent elements.

A system is a group of objects that are joined together in some regular

interaction or interdependence toward the accomplishment of some
purpose. A system is often affected by changes occurring outside the
system. Such changes are said to occur in the system environment.

A business gets input from environment and transmits its output after
process or conversing to the environment. Hence, a business has close
relation with its environment.

The business system is largely affected by the internal as well as external

environment of a business. Some of the important aspects of their relation
are as follows:

1. Economic environment

The economic environment of the business is one of the external factors

that can influence strategy and decision-making. Economic factors include
GDP, exchange rates, taxation, interest rates, fiscal policy, monetary policy
and inflation.

2. Micro environment

Understanding the microenvironment is essential for businesses as it helps

them identify opportunities, assess risks, and develop effective strategies.
These factors are closer to the company and have a more immediate
impact than the macro environment, which includes broader societal,
economic, and political forces.

3. Task environment

The task environment denotes the external forces of the business

environment that affect a business's ability to achieve its goals. As such, it
comprises factors such as customers, suppliers, competitors, labor force,
special interest groups and government regulation.

4. Political environment

The political environment in business encompasses the governmental

activities and the political conditions that impact the operations of a
business. Some of the political factors include political stability and
employment laws.

5. Opportunity and Threats

Opportunities and threats are identified by conducting research on the

objective decided on by the corporation. If a situation or event is
determined to improve business, it is considered an opportunity. If it would
be an obstacle to doing business, it is a threat.

6. Information and technology

Information technology is now used in daily operations of any business. IT

has enabled an ease of doing business by managing overheads, regulating
recruitment, dealing with market uncertainty, managing inventory,
monitoring employee performance, dealing with employee grievances and
so much more.
7. Input-output system

The input-output model shows the relationship between the elements

needed to come into a company to make products, and the actual final
goods that are produced as a result of those inputs. For example, some
inputs might be money, supplies or knowledge, or labor.

Components of Business Environment

The component of business environment is broadly classified into two
categories describes as follows:

A. Internal Environment

The internal environment of an organization refers to the conditions,

structures, and factors that exist within the organization and affect its ability
to function and reach its objectives.

It refers to all the elements that are internal to an organization and are
regarded as components that give strength to an organization if are
positively affecting and weakens if are negatively affecting the organization.

These can be easily controlled and adjusted if needed by an organization.

G.R. Agrawal "Internal environment consists of conditions and forces within

the business organization that affects its performance and outcomes."

Some of the factors of internal environment are as following:

1. Goals and Policies

Policies are rules that define the objectives of operation of a specific

organization. Goals define the intentions.

Every organization has their own policies and goals that directs an
organization.

2. Organizational Structure

A company's organizational structure is the hierarchy of the business's

teams, leaders, managers, and individual contributors. Organizational
structures determine what employees' do, whom they report to, and how
decisions are made.

It establishes chain of command along with span of control required to

smoothly operate an organizational functions.

3. Organizational Resources

Organizational resources consist of the concrete materials and tangible

assets that support programs, practice improvements, and service delivery.
They encompass adequate and stable funding, staffing, facilities and
equipment, technology, informational resources, and program materials.

Some of the major resources that impact business operations are as

follows:

a. Human resources: employees, size, knowledge, skills, capabilities,

commitment, relationship, dedication etc.

b. Physical resources: sophistication and location of plant, and equipment,

and access to raw materials

c. Financial resources: borrowing capacity, and internal fund generation

system, cash and bank,

d. Information resources: formal planning and reporting structure, control,

and coordination system

e. Shareholders: interest, needs and concern of share holders, general

meetings, board of directors etc.

f. Labour unions: employee and labour unions, participation in decision and

other activities, pressure groups, etc.

4. Organizational culture

It refers to the complex set of ideologies, symbols, and core values that are
shared throughout the firm.

It influences how the firms conduct business and is a complex

phenomenon and transfers over generations.
Some of the factors are:

 Employees collective values and norms, beliefs and perceptions

 Employees relationship, friendship and cooperation
 Employees commitment and dedication, capabilities
 Employee and management relation, trust and empathy
 Capabilities and dedication of management'
 Social responsibilities
 Work autonomy
 Communication
 Employees involvement in management

B. External Environment

External environment definition refers to the outside influences and factors

that affect business operations.

It comprises the factors external (outside of) business and are

uncontrollable in long run and determines the threat (negative) and
opportunities (positive) of an organization.

It can be general/remote/macro environment and operating/task

environment

The general factors are political, economical, socio-economic,

technological, legal, natural, and global whereas operating are customers,
suppliers, competitors, creditors/financial institutions, distributors,
government, pressure group.

The external environment significantly influences a business' strategic

decisions, opportunities, threats, and overall performance. The external
environment of a business refers to all the factors outside the organization
that have the potential to affect it.

Ricky Griffin- "External environment is everything outside an organization

that might affect it."
The basic components of external environment are:

1. Task Environment

The task environment denotes the external forces of the business

environment that affect a business's ability to achieve its goals.

It is an external environment of an organization which affects its ability to

reach business goals. Any business or consumer with direct involvement
with an organization may be part of the task environment. Examples of task
environment sectors include competitors, customers, suppliers and labour
supply.

It is also known as operating environment or competitive environment. At

many conditions it can be controlled or adjusted through negotiation so it is
also referred as adjustable external environment.

a. Competitors

Competitors are other companies offering similar (or better) products and
competing for the same customers. It may have less of an impact on day-
to-day business, but they do have to be considered. They are considered
as threats to any business.

b. Suppliers

Persons or firms providing inputs to the business needed to produce goods

and services.

The quality of products always depends upon the quality of input, price,
delivery time, and other terms and conditions with the suppliers, so a good
relationship with suppliers always creates business opportunities for any
organization.

c. Consumers

They are considered as important elements as every business activities are

directed towards them and besides purchasing products they are also
source of information and ideas.
They may be individual, family, and firms etc. and a firm must focus on
satisfying their needs and demands building a long term relationship with
them.

d. Labour unions

A union is an organization formed by workers who join together and use

their strength to have a voice in their workplace, through which workers
have the ability to negotiate from a position of strength with employers over
wages, benefits, workplace health and safety, job training and other work-
related issues.

And a firm must build positive relationship with these unions and their
members to garb business opportunities.

e. Pressure groups

They are organized groups of people who actively work together to

promote and defend their common interests. They aim to bring about
changes in policies by putting pressure on the organizations. They act as a
link between the organization and their members.

f. Labour market

It refers to the supply of and demands for labor. Also known as the job
market, it's based on employees providing the supply and employers
providing the demand.

Labour actually means any type of physical or mental exertion and the
efforts exerted to produce any goods or services. It includes all types of
human efforts – physical exertion, mental exercise, use of intellect, etc.
done in exchange for an economic reward.

g. Media

Media can help businesses to build brand awareness by sharing their story,
values, and products with a large audience.

It can be used to drive sales by promoting products and services,

generating leads, and running social media ads.
h. Distributors

A distributor acts as a middleman between the producer and the end

customer. They purchase the products from the exporter and gain
ownership, meaning they can set the price and terms of sale within their
defined territory.

i. Financial institutions

The most common types of financial institutions include banks, credit

unions, insurance companies, and investment companies. These entities
offer various products and services for individual and commercial clients,
such as deposits, loans, investments, and currency exchange.

2. General Environment

The general environment, or macro-environment, is the variety of factors

beyond an organization's control that affect their operation and
performance.

These external influencers can determine whether a business experiences

opportunities or setbacks in the marketplace.

Some of the important factors in general environments are as follows:

a. Economic environment

The term 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).

Businesses flourish, people get more job opportunities, and customers

spend more because of a favorable economic environment.
b. Political environment

In the business context, the political environment refers to the laws,

regulations, and government policies that can affect the operations and
performance of companies.

It includes the external constraints linked to governmental activities and

political conditions that affect a business' area of operation. External
constraints are factors that affect businesses and are beyond their control.
They include factors such as taxation, political stability, and employment
laws.

c. Socio-cultural environment

It basically means the mix of society and culture that affects how people
think, feel, and act, which can also affect our health.

It includes things like how wealth, education, career, cultural background,

race, ethnicity, language, and beliefs shape people's identity and health.

Social cultural factors influence the feelings, attitudes, values, beliefs and
interactions of a population group.

Examples include social classes, religious norms, wealth distribution,

language, business and health practices, social values and attitude towards
work.

d. Technological environment

It refers to external factors in technology that impact business operations.

Changes in technology affect how a company will do business. A business
may have to dramatically change their operating strategy as a result of
changes in the technological environment.

Environmental Analysis
An environmental analysis, also called an environmental scan, is a
strategic tool used to identify and assess all external and internal elements
in a business environment. It examines organizational and industry factors
that can positively or negatively affect the business and its success.
It helps organizations identify internal and external elements that can either
negatively or positively impact their business. By looking at factors, such as
the economy and technology, businesses can anticipate potential
opportunities and threats.

It primarily aims to evaluate a business's external and internal environment

to identify opportunities, threats, strength and weakness.

With this information, a business can create a roadmap with strategies that
takes advantage of the opportunities and mitigate the threats.

Process of Environmental Analysis

Environmental analysis consists of four sequential steps taken to analyze

the business environment.

1. Scanning

The environment scanning is the process of the collection, evaluation, and

delivery of information for a pre-defined purpose. The environmental
processing requires both personalized and accurate data regarding the
business environment where the business operations are actually taking
place.

2. Monitoring

Environmental monitoring is a tool to assess environmental conditions and

trends, support policy development and its implementation, and develop
information for reporting to national policymakers, international forums and
the public.

The data is gathered from various sources and is utilized to monitor and
find out the trends and patterns in the environment. The main sources of
collecting data are spying, publication talks with customers, suppliers,
dealers and employees.
3. Forecasting
Forecasting is a technique whereby managers attempt to predict the future
characteristics of the organizational environment and hence make decisions today
that will help the firm deal with the environment of tomorrow.

It is a technique of predicting the future based on the results of previous

data. It involves a detailed analysis of past and present trends or events to
predict future events. It uses statistical tools and techniques. Therefore, it is
also called Statistical analysis.

4. Assessing

It can be defined as identifying, estimating, and evaluating the

environmental impacts of existing and proposed projects, by conducting
environmental studies, to mitigate the relevant negative effects prior to
making decisions and commitments.

It allows organizations to anticipate opportunities and plan responses to

them. A solid analysis can also help an organization to recognize threats
before time and counter them or even turn them into opportunities.

Techniques of Environmental Analysis

1. SWOT analysis

SWOT analysis acronym for strengths, weaknesses, opportunities, and

threats is a framework used to evaluate a company's competitive position
and to develop strategic planning. SWOT analysis assesses internal and
external factors, as well as current and future potential.

It is a framework for identifying and analyzing an organization's strengths,

weaknesses, opportunities and threats. The primary goal of SWOT analysis
is to increase awareness of the factors that go into making a business
decision or establishing a business strategy.

a. Strength

Strength is a resource or capacity the organization can use effectively to

achieve its objectives.
b. Weakness

A weakness is a limitation, fault, or defect in the organization that will keep

it from achieving its objectives.

c. Opportunities

An opportunity is any favorable situation in the organization's environment.

It is usually a trend or change of some kind or an overlooked need that
increases demand for a product or service and permits the firm to enhance
its position by supplying it.

d. Threat

A threat is an unfavorable situation in the organization's environment that is

potentially damaging to its strategy. The threat may be a barrier, a
constraint, or anything external that might cause problems, damage or
injury.

2. PESTLE analysis

A PESTLE analysis studies the key external factors (Political, Economic,

Sociological, Technological, Legal and Environmental) that influence an
organization.

a. Political factors

Political factors include government policies, leadership, and change;

foreign trade policies; internal political issues and trends; tax policy;
regulation and de-regulation trends.

b. Economic factors

Economic factors include current and projected economic growth; inflation

and interest rates; job growth and unemployment; labor costs; impact of
globalization; disposable income of consumers and businesses; likely
changes in the economic environment.
c. Socio-cultural factors

Social factors look at trends such as lifestyle factors, cultural norms and
expectations such as career attitudes and work-life balance. It also
concerns itself with consumer tastes and buying habits as well as
population demographics.

d. Technological factors

It includes production techniques, information and communication

resources, production, logistics, marketing, and e-commerce technologies.
These affect how an organization operates, sells its products, interacts
with, and gathers intelligence on customers, suppliers, and competitors.

e. Legal factors

Legal factors include - health and safety, equal opportunities, advertising

standards, consumer rights and laws, product labeling and product safety.
It is clear that companies need to know what is and what is not legal in
order to trade successfully.

f. Environmental (Physical) factors

Environmental factors are any of the trends or impacts of the literal

“environment” itself – ranging from natural disasters to climate change,
from environmental regulations to rising demand for eco-friendly “green”
products.

3. ETOP analysis
ETOP analysis (environmental threat and opportunity profile) is the process by
which organizations monitor their relevant environment to identify opportunities and
threats affecting their business for the purpose of taking strategic decisions.

It focuses on the environmental threats and opportunity profile of a

business to take calculated business decisions.

It provides a clear of which sector & subsectors have favorable impact on

the organization and help to interpret the result of environmental analysis.
The organization can assess its competitive position and appropriate
strategies can be formulated to take advantage of opportunities & counter
the threat.

Business Environment Analysis for Strategic Management

Business Environment

Business Environment means a collection of all individuals, entities and

other factors, which may or may not be under the control of the
organization, but can affect its performance, profitability, growth and even
survival.

It helps in defining the strength, weakness, opportunities and threat.

The business environment is changing very rapidly and the industry is

getting affected by changing market conditions. Turbulent market
environment, less brand loyalty, divisions of markets, changes in fashion,
more demanding customers, and global competition are some examples of
changing the business environment.

Strategic Management

Strategic management involves developing and implementing plans to help

an organization achieve its goals and objectives. This process can include
formulating strategy, planning organizational structure and resource
allocation, leading change initiatives, and controlling processes and
resources.

Ultimately, strategic management exists for organizations to gain a

competitive edge over their competitors. It helps in formulating and
implementing the best strategy required through environmental analysis
that further helps in deciding what strategy is appropriate in which
environment.

Strategy management can be explained more with the following points:

1. Strategic Formation

Strategy formulation is the process of using available knowledge to

document the intended direction of a business and the actionable steps to
reach its goals. This process is used for resource allocation, prioritization,
organization-wide alignment, and validation of business goals.

2. Strategic implementation

Strategy implementation is the act of executing a plan to reach the desired

goal or set of goals. The brainstorming process helps formulate these
ideas, while the implementation process puts those strategies or plans into
action.

3. Strategy control

Strategic control is part of a strategic management process that shows how

well your strategy is doing now, so you can further refine it for future
execution. It helps you achieve future goals by evaluating historical
performance so you can identify patterns and trends, and spot risks early
on.

4. Feedback

Constructive feedback provides valuable insights into strengths and areas

for improvement, guiding tailored developmental interventions. Analyzing
feedback helps in honing foresight, decision-making, and adaptability,
crucial elements in effective strategic planning.