Do you know what environment means in business? Do you want to learn more about this business topic? If yes, then you are in the right place. This article will serve as your guide on everything relating to this topic. It will answer the question, “what is environment in business?”.
As you read further, you will learn other important things about this topic, such as;
- Types of the business environment
- Business environment characteristics
- How a business environment can affect a business
- factors of business environments and other related information.
This will be an interesting and very educative read.
So, ensure you read to the end.
Meaning of Business Environment
A business environment is a term that refers to every factor (external and internal factors), condition, and event that directly or indirectly affects a business.
These factors can be anything from the business resources, employees, customers, competitors, suppliers, investors, and the government.
All these factors often determine the business’s process to a considerable point.
They can also influence business performance and functions.
While some of these factors are completely out of the business’s control, they can still significantly affect it.
For instance, the government is a potent factor that can significantly affect a business.
An increase in government tax will affect a business’s net profit.
In the same way, a change in the customers’ taste can influence demand which would affect the company.
The company’s internal factors can also affect it to a large extent.
For instance, if the company does not treat its employees well, this may increase its employee turnover rate.
This can subsequently cause the company to spend more money recruiting and training new staff.
Business Environment Components – What is Environment in Business
Business environments are made up of two major components; external and internal components.
A company’s internal environment comprises different elements and factors within the company.
These elements often affect the company’s choices and activities.
Likewise, they can also be affected by the company’s choices and activities.
Internal elements include the company’s culture, workforce, management, management policies and practices, equipment, business processes, value system, vision, objectives, organizational structure, human resources, etc.
The good thing about internal factors is that the company can control them.
On the contrary, a company has little to no control over external factors (factors outside the company).
A change in government policy, advancement in technology, the economy of a state and change in customer taste can affect a company externally.
Companies typically have external factors because they cannot operate all by themselves.
These external factors can influence business environments and, by extension, impact a company’s internal processes.
Types of Business Environment
There are 4 major business environments; micro, macro, natural, and market.
Let’s look at each of them individually.
Micro Environment
A business’s microenvironment directly impacts it.
It consists of every element that influences a company’s functioning.
This means a business will only function optimally if its microenvironment is in order.
Elements in this environment include suppliers, investors, customers, and so on.
Macro Environment
The macro-environment, like the microenvironment, is external.
It includes factors outside the business market and its microenvironment factors.
Some examples of business macroenvironment factors include employment rates, Inflation, Gross Domestic Product, expenditure, monetary policies, etc.
Natural Environment
This business environment concerns the natural resources a company uses to carry out its operations.
Let’s use a manufacturing company to explain this type of business environment.
So, a manufacturing company’s natural environment will typically include factors like how a company sources for and purchases raw materials.
Also, it includes how the company handles natural disasters like floods, forest fires, etc.
Market Environment
This is made up of every factor that affects a business’s marketing strategies and policies.
The market environment includes both internal and external factors.
These factors significantly impact a company’s business strategy.
Business Environment Characteristics – What is Environment in Business
Business environments have certain unique characteristics.
To monitor your business environment, you need to know and understand these characteristics.
This will make it easier to identify specific factors and understand them better.
With that said, below are 5 major business environment characteristics.
Dynamic
Business environments are quite dynamic as they occasionally change.
The reason for this is the changes in the various factors that influence the business environments.
Complex
Business environments are typically complex as the environments consist of several factors.
And these factors work together to create a good business environment.
A business can do well in one environment but may not live to its potential because it needs to improve in other environments.
While every factor is closely related, they are still very much independent.
One factor may experience change and affect the other factors.
For instance, a social change can result in a political change.
The link between these factors has made the business environment complex because understanding how one aspect influences another is quite difficult.
So, business owners have to consider every aspect of their business environment as it relates to others.
This can be quite a task as they cannot analyze the relationship between the different factors.
Uncertain
The dynamic nature of business environments also makes it very uncertain.
You’d have difficulty forecasting the business environment’s future because a change can come fast and unexpectedly.
A product can become obsolete because a newer and better one has come and taken its spot.
This can happen without warning and cause companies to go out of business.
Predicting future environments and trends is even more difficult in certain industries like fashion.
This is because these industries are more prone to changes.
Relativity
Business environments are relative and can differ based on the region, state or country.
What may be considered an excellent business environment in one country may fail in another.
For example, the technology in one country may be far different from the technology in other.
This is why the demand for a particular product may be quite high in one country while that product would struggle to sell in another.
Multi-Faceted
This means that business environments typically have different sides and parts.
This is due to their dynamic, uncertain, and complex nature.
So, an environmental change may benefit one industry while it may cripple or create challenges for another.
Therefore, you must consider its multi-faceted nature when considering business environments.
This way, you could analyze it from all points worth examining.
Factors of Business Environment – What is Environment in Business
To properly monitor and manage your business environments, you need to know the different factors that influence business environments.
When you know these factors, you can then monitor and consider them to create a good business environment.
Therefore, we’ll look at some common factors that influence business environments below.
Legal/Political Factors
These are external factors that influence a business’ operation.
They can determine the business processes and whether or not the business can operate within a particular region.
For a company to operate in a particular location, it must meet all the regulations and legislative policies of the region.
If there is a new policy, the company would need to modify its processes to adhere to it.
If it is unable to, it could mean the end of the business.
Examples of legal and political factors include taxation, employment laws, tariffs, importation regulations, and so on.
Competitors
How a company handles its competitors can influence its growth and success to a considerable extent.
A business that stays ahead of its competitors will have a higher success rate than a company that can barely measure up to its competition.
This is why market research is vital, as it can help a company learn a lot about its competition.
A company that takes its time to study its competition can come up with a great strategy that would help it get a good competitive edge.
This can help a company stay relevant and continue to grow.
But if a company cannot take charge of this factor, it may struggle to make sales and even stay operational.
Demographics – What is Environment in Business
Demographics refers to the characteristics of your customer base.
These characteristics include age, nationality, income level, marital status, gender, race, etc.
And all of these can significantly affect business environments.
As a business owner, this is why you need to study and analyze your audience demographics.
This way, you’ll be able to tailor your message to resonate better with your customers.
Furthermore, you’ll know how to present the products in a way that will address your audience’s pain points and highlight how the product will address the pain point.
By marketing your products with the right message, your business will have a higher chance of making sales.
Technological Factors – What is Environment in Business
The technological factor is yet another external factor that can significantly affect a business.
If a business fails to keep up with technological trends, it will fall behind others.
It can cause the company to lose sales.
For instance, many people have turned to online shopping because of technological advancement.
If you run a business that does not offer this option to customers, you would likely lose the customers that prefer online shopping to offline shopping.
Technological factors can also affect your business in other ways other than sales.
It can affect communications, inventory management, billing processes, etc.
A lot of companies have taken advantage of technology to automate certain tasks and subsequently reduce certain costs.
Your business will likely suffer if you fail to consider and make the most of technological factors.
Global Factors
This factor influences a company’s international dealings.
The world is a global market now, and it is all thanks to technology and globalization.
This makes it possible for companies to operate internationally.
However, a company must consider global factors when dealing with other countries.
They need to understand the cultural and social factors linked with global factors.
Social Factors
A customer’s needs are sometimes tied to some societal factors.
This means that a customer’s location can, to a large extent, determine their buying decisions.
Therefore, for a company to thrive in any location, it needs to understand the customers and the social factors of the environment.
These factors include societies, current events, and so on.
Importance of Understanding your Business Environment
Now you know the meaning of business environment and even its various types.
But you may be wondering why you should even be bothered about it.
As a business owner, you need to study and understand your business environment.
This can make or mar your business.
Your business environment will typically change from time to time.
If you do not understand the business environment, you will not notice these changes let alone adapt to them.
When you cannot adapt to the changes in your business environment, you won’t be able to keep your business relevant for long.
This is one of the major reasons why understanding the business environment is very important.
Other than this, there are several other advantages your company can enjoy if you study and clearly understand your business environment.
Let’s consider some of these benefits below.
Helps You Identify Opportunities
When you understand your business environment, you will easily identify opportunities for your business.
This is because you will be able to predict specific environmental changes.
You can then adjust your company’s policy, strategies, and processes to help you take advantage of these predicated opportunities.
For example, let’s say you run a retail business and you spot that your customers’ tastes may change soon, and this would cause an increase in demand.
You can stock up now to ensure you meet the demand once it spikes.
Demand often influences product costs.
Therefore, stocking up while the demand is yet to go up means you would get the goods at the usual rate, and you can still sell at the increased price once demand increases.
Helps You Spot Threats and Challenges
Understanding your business environment will help you spot opportunities, threats and challenges.
Also, when you spot opportunities, you can adjust your business processes to help you combat them.
For example, let’s say you run a manufacturing company, and there’s an impending political environment change that would restrict raw material importation.
If you spot this early, you can get more raw materials than you usually do, so they will last you a while.
You can also source for another way to get your raw materials beforehand.
This way, you would be able to keep manufacturing your products.
Improves Public Image
Your customers will certainly notice if your business is up-to-date with every major thing happening in every business environment.
They would see that your brand is concerned with its environment and the needs of the public.
Understanding business environments can help your business build its public image and reputation.
For instance, you’d understand your socio-environment enough to cater to your customers in a way that suits their cultural beliefs.
Helps with Planning
When you understand business environments, you can make great plans to accommodate environmental changes.
It will aid your strategy formulation and implementation.
You won’t be caught unaware of certain changes, and you’d be able to plan.
Encourages Continuous Learning
When you take monitoring business environments as a priority, you’d know that you continuously have to study the environment.
You and other key players in your business, and even your employees, will have to keep in touch with the ever-changing dynamics of the business environment.
This would significantly increase your business growth and success rate.
It Could make you a Trend-Setter
Understanding business environments can also mean that you can be a change agent within your industry.
It means you can spearhead significant changes within your organization, niche, and industry.
This can also give you a first-mover edge.
Suppose you are the first company to do something new within your industry.
In that case, customers will recognize you as the pioneer of that thing and would rather patronize your business even when your competitors adopt it.
Makes Your Business Customer-centric
This is yet another important benefit that understanding business environments will offer your company.
Because you are sensitive to the factors surrounding your business, you will easily spot the changes in your customers’ expectations and needs.
Also, you’d be able to develop and implement the best strategies to help you cater to these changes.
Your customers will notice how customer-centric your brand is, and this will increase their loyalty levels.
Loyal customers are often equal to return customers.
It also means they would not hesitate to refer your business to those around them.
Overall, understanding business environments can help you retain customers, increase sales, and increase your business growth rate.
Conclusion on What is Environment in Business
As a business owner, it’s important to understand your business environment.
This would help steer your company in the right direction to increase sales and growth.
This article has looked at several aspects of this topic.
Hopefully, you have gathered enough information to help you clearly understand this topic and how to use it to your advantage.
