BMGT 300 –ORGANISATION THEORY

TOPIC THREE: CONCEPT OF THE BUSINESS ENVIRONMENT

Understanding the environment within which the business has to operate is very important for
running a business unit successfully at any place. Environmental factors influence almost every
aspect of business, be it its nature, its location, the prices of products, the distribution system, or
the personnel policies.
Business environment may be defined as the total surroundings, which have a direct or indirect
bearing on the functioning of business. It may also be defined as the set of external factors, such
as economic factors, social factors, political and legal factors, demographic factors, and technical
factors etc., which are uncontrollable in nature and affects the business decisions of a firm.
Thus, all elements which lie outside the organisation are called external environment. On the
other hand, the organisation may create an environment internal to it which affects the various
sub-systems of the organisation.

Businesses establish, grow or operate and die within the environment. It exchanges resources in
the environment. It collects inputs i.e. human resources, money, materials, machines etc. And
provides output i.e. Goods and services in the environment. Environment means surrounding.

Importance of Business Environment

Each business firm has to exist, survive and grow in relation to the various forces of the business
environment. Thus the business environment is important for the following reasons:
1. Enabling the identification of opportunities and getting the first mover advantage:
Business environment provides many opportunities to the firms to improve their
performance. The firms which are able to scan these opportunities at an early stage get
maximum benefit and can leave their competitors behind. For example, development of
the MPesa concept has given Safaricom an edge over other mobile service providers.
2. Helping in the identification of threats and early warning signals: Understanding the
business environment enables an organisation to identify information and signs of threats
to the business in advance, thus preparing the organisation to face these possible
challenges. For example, if any new multinational Corporation (MNCs) e.g. Vodafone
(large Mobile phone service provider in UK) is entering the Kenyan market, the CEO and
Board of Management of Safaricom, should take it as a warning signal. They should
handle this threat proactively and well ahead of the launch of Vodafone’s product by
taking measures like improving the quality of their products, carrying out massive
advertisements, etc.
3. Tapping useful resources: Businesses require different resources/inputs such as raw
materials, tools, equipments, finance, labour, technology, etc which are obtained from the
business environment. Thereafter, the firms supply their finished product/service (output)

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 to the environment. Thus, we can say that business firms depend fully on the
environment, for inputs and for receiving their outputs.
4. Coping with the rapid changes: The Business environment is quite dynamic due to
changing technologies, changing markets, customer demands, competition, etc. Thus, in
order to efficiently cope with these changes, managers must understand the environment
and should adopt appropriate courses of action at the right time. It helps management
become more sensitive and responsive to ever changing needs of customers.
5. Assisting in planning and policy formulation: Business environment brings both
threats and opportunities to a business. Hence, understanding of environment helps the
management in future planning and decision making. For example, competition increases
with the entry of new firms in the market.
6. Improvement in performance: Organisations that monitor their environment closely
can adopt suitable business practices not only to improve their performance but also to
become leaders in the industry.
7. Image building: Understanding the business environment enables the organisation to
manage emerging challenges and be responsive to customer needs. This helps in building
the image or reputation of the firms.

Features of Business Environment

1. Totality of external forces: Business Environment includes all the forces, institutions and
factors which may directly or indirectly affect the Business Organizations.
2. Specific and general forces: Business environment includes specific forces such as
investors, customers, competitors and suppliers. Non-human or general forces are Social,
Legal, Technological, Political, etc. which affect the Business indirectly.
3. Inter-relation: All the forces and factors of Business Environment are inter-related to each
other. For example, change of economic policy with assent to power of a new government.
This shows relatedness of economic and political forces.
4. Uncertainty: It is very difficult to predict the changes of Business Environment. As
environment is changing very fast for example in IT, fashion industry frequent and fast
changes are taking place.
5. Dynamic: Business environment is highly flexible and keep changing. It is not static or
rigid that is why it is essential to monitor and scan the business environment continuously.
6. Complex: It is very difficult to understand the impact of Business environment on the
companies. Although it is easy to scan the environment but it is very difficult to know how
these changes will influence Business decisions.

Relationship between Environment and Business

The environment is closely related with business. There is a constant ‘give and take’ relationship
between environment and business. The business receives inputs, information and technology
from the environment and gives it back in the form of outputs (goods and services).

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If these outputs are accepted by the environment, the environment-business interaction continues
but if they are unacceptable to the environment, organisations adapt to the environmental
requirements and change their operations.
The organisation has to look after the interest of stakeholders like shareholders, consumers,
workers, suppliers etc by continuously monitoring the business environment. Further, the
environment also offers threats and opportunities to which organisations have to respond
positively.

Business and environment interaction takes place in the following ways:

1. Business is affected by economic conditions of the environment. During recessionary
conditions, for example, businesses reduce production or stock pile their products in
order to sell during normal or boom conditions. Business, on the other hand, can create
artificial scarcity by hoarding goods and forcing rise in prices. Both business and
environment, thus, affect and are affected by each other.
2. When financial institutions increase the lending rates, firms may resort to other sources of
funds, like bank loans or internal savings (reserves). This may force the financial
institutions to lower the interest rates. The financial environment and the business system,
thus, act and interact with each other.
3. The firm’s micro environment consisting of workers, suppliers, shareholders, distributors,
etc affect business activities and this in turn affect them. For instance, workers demand
high wages, suppliers demand high prices and shareholders demand high dividends.
4. Businesses receive useful information from the environment regarding consumers’ tastes
and preferences, technological developments, Government policies, competitors’ policies
etc and provide useful information to the environment regarding its goals, policies and
financial returns. This information is transmitted to environment through annual reports
as a requirement of disclosure practices.
5. The basic function of a business enterprise, input-output conversion, is carried through
active interaction with the environment. It receives inputs from the environment, converts
them into outputs through productive facilities which are also received from the
environment and sends them back to the environment. A constant feedback is received
from the environment to improve its performance.
6. The environment offers threats and opportunities to business systems which they
overcome and exploit through their strengths and weaknesses. SWOT analysis helps in
integrating external environment with the internal environment.
The business and environment, thus, have much to give and take from each other. The
economy is structured by effective interaction of the business and its environment. The
business-environment interaction is a continuous process. It is like a biological organism
that keeps environment and management responsive to each other.

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 This interaction is shown as:

Types of Business Environment

The business environment can be classified to consist of internal and external factors. Managers
operate in two organizational environments, namely, internal and external both made up of
people whose interests are affected by the organization.

External stakeholders

International GENERAL ENVIRONMENT

Forces Economic forces
Technological forces
SPECIFIC/TASK ENVIRONMENT External stakeholders Economic
Media Customers Competitors
Trade Unions
INTERNAL STAKEHOLDERS
Political-
Legal  Employees
Interest Groups
Forces  Owners
 Board of directors Suppliers
Strategic Allies

Government Regulators Local Communities

Distributors Special Interest Groups

Demographic trends Socio-cultural forces

Government
Figure 1 the organization’s environmentunions’ Allies
Demographic trends Socio-cultural forces

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Internal environment
This is defined as all the forces or conditions that are available within an environment that affects
on organization and business. It is also known as controllable factors because business can
control them. It includes:

1. Owners: The owners of an organization consist of those who can claim it as their legal
property. Ownership may be in the form of:
 Sole proprietorship
 Partnership
 Stockholders
2. Board of directors: These are elected by stockholders to see that the company is being
run according to their interests. Board members are important in setting the
organization’s overall strategic goals and improving the major decisions and salaries of
top management
3. Employees: Business hires employees. It is the major internal factor. It works inside the
business. It can be controlled by the business. Employees differ in skill, knowledge,
morality, and attitude and so on. When managers and employees have difference in goals
and beliefs then conflict may arise. The task of management is to divide the work and
assign the work to the suitable employee and handle the conflict. As a manager, check if
employees are motivated, hard-working and talented. They will produce better results
compared to an unmotivated and less talented workforce. The processes and relationships
between and within departments can also improve effectiveness and efficiency.
In a high performing workplace, the workers not only have talent, but they also work
better together. The employees and departments collaborate on ideas and resolutions.
Employees are vital to business success. But, there are risks associated with them. For an
industry, strike action could lead to a lot of problems.
4. Shareholders: Management deals with many shareholders. Shareholders have the right
of ownership, power of management and voting right. The actual management of
organization is carried out by elected representative of shareholders jointly known as boar
of directors. Boards of directors have the responsibility of overseeing the management of
organization. It plays the major role in formation of objectives, policies, strategies of the
organization as well as their implementation.
5. Organization structure: It is located inside the organization. The arrangement of
various facilities, pattern of relationships among the various department, responsibility,
authority and communication is the organization structure. It also included specialization
and span of control.
6. Organization culture: The sets of values that help the members to understand what
organization stand for how it does work, what it considers, cultural values of business
forces of business and so on. It helps in direction of activities.

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 7. Organizational and operational: These are a part of the operational and administrative
procedures. This includes disorganized or inaccurate record keeping. Interruptions to
your supply chain and outdated or faulty IT systems are also factors you should evaluate.
If you do not overcome these, your customers might see you as unreliable. You can also
lose all your data.
8. Strategic risks: These affect your firm’s ability to reach the goals in the business plan.
They could be due to the impacts of changes in technological evolutions or customer
demand. These factors could pose as threats as they can alter how customers perceive
your product. Based on these, customers might think a product is overpriced, dull and
outdated.
9. Innovation: Your business needs innovation in order to keep up with competitors. It is
essential to get one step ahead. Innovation could come in the form of marketing. It could
also be through promotional initiatives in the marketing plan, staff training, and welfare.
Embracing new technology is the best way to keep up with technological advancements.
A lack of innovation can pose a serious risk to a growing business. No innovation will
cause a company to remain boring. The company will become dull, stagnant and
irrelevant.
10. Financial: The financial risks depend on the financial structure of your business. It is
also dependent on your business transactions and the financial systems. For example,
changes in interest rates or being overly reliant on one customer could affect business.
11. Unions: Trade unions are formed to safeguard the interest of its members/workers. The
role of trade union leaders is critical in the achievement of HR activities such as
recruitment, selection, training, compensation, industrial relations and separations.
12. Value system: The value system of the business owners and top management will affect
choice of business, the mission and the objectives of the organization, business policies
and practices.
13. Mission and vision and objectives: Vision means the ability to think about the future
with imagination and wisdom. It is an important factor in achieving the objectives of the
organization. The mission is the medium through which the objectives are achieved.
14. Management structure and nature: The organizational structure like the composition
of board of directors influences the decisions of business as they are internal factors. The
structure and style of the organization may delay a decision making or may help in
making quick decisions.
15. Company image and brand equity: The image of the company in the outside market
has the impact on the internal environment of the company.

External environment
All the forces and condition that cannot be controlled by the business is called external
environment. It is also known as uncontrollable factors because business can’t control them. It is
located outside the business. It affects on organizational performance.

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External environment factors

PESTEL analysis stands for "Political, Economic, Social, and Technological, Environmental
and Legal analysis". It is a part of the external analysis when conducting a strategic analysis or
doing market research and gives a certain overview of the different macroenvironmental factors
that the company has to take into consideration.

1. Political factors: How and to what degree a government intervenes in the economy.
Business must fulfill demand of government. Specifically, political factors include areas
such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political
stability. Political factors may also include goods and services which the government
wants to provide or be provided (merit goods) and those that the government does not
want to be provided (demerit goods or merit bads). Furthermore, governments have great
influence on the health, education, and infrastructure of a nation. There should be non-
violation of rules and regulation of government. Business should avoid unfair trade and
should provide essential information to the government.
2. Economic factors include economic growth, interest rates, exchange rates and the
inflation rate. These factors have major impacts on how businesses operate and make
decisions. For example, interest rates affect a firm's cost of capital and therefore to what
extent a business grows and expands. Exchange rates affect the costs of exporting goods
and the supply and price of imported goods in an economy
3. Social factors include the cultural aspects and include health consciousness, population
growth rate, age distribution, career attitudes and emphasis on safety. Trends in social
factors affect the demand for a company's products and how that company operates. For
example, an ageing population may imply a smaller and less-willing workforce (thus
increasing the cost of labor). Furthermore, companies may change various management
strategies to adapt to these social trends (such as recruiting older workers).
4. Technological factors: These include ecological and environmental aspects, such as
Research &Development activity, automation, technology incentives and the rate of
technological change. It defines the methods available for converting resources into
product or services. It transforms inputs into output. Inputs means material, capital, man,

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 machine. It affects a business. It helps to change the level of job, skill, and product and so
on. There can be innovation, development of scientific techniques which encouraged
mass production and distribution. They can determine barriers to entry, minimum
efficient production level and influence outsourcing decisions. Furthermore,
technological shifts can affect costs, quality, and lead to innovation.
5. Environmental factors include weather, climate, and climate change, which may
especially affect industries such as tourism, farming, and insurance. Furthermore,
growing awareness to climate change is affecting how companies operate and the
products they offer--it is both creating new markets and diminishing or destroying
existing ones.
6. Legal factors include discrimination law, consumer law, antitrust law, employment law,
and health and safety law. These factors can affect how a company operates, its costs, and
the demand for its products.

Other factors emanating from the task/micro-environment are as follows:

1. Customers: Customers are those who pay to use an organization’s goods or services. The
organization therefore needs to take care of its customers.
2. Competitors: these are people or organizations that compete for customers or resources
such as talented employees or raw materials.
3. Suppliers: this is a person or an organization that provides supplies i.e. raw materials,
services, equipments, labour or energy to other organization
4. Distributors: This is a person or an organization that helps another organization sell its
goods and services to customers. The distributor has a lot of power over the ultimate
price of the product. However, popularity of the internet has allowed manufacturers to cut
out the “middle man” or the distributor, to sell directly to the customer
5. Employee organization: unions and organizations: These organizations represents the
interest of the employees
6. Local communities: These are important stakeholders to the business
7. Financial institutions: They provide financial assistance to businesses
8. Government regulators: These are regulatory agencies that establish ground rules under
which organization may operate, e.g. NEMA, Kenya Airports authority etc
9. Special interest groups: These are groups whose members try to influence specific
issues e.g. Save the Mau, Friends of Lake Nakuru
10. Mass media: No manager can afford to ignore the power of the mass media, print, radio
TV and internet - to rapidly and widely disseminate news - both bad and good. Thus,
most universities, companies hospitals have a public relations person or department to
communicate effectively with the press