written by | September 28, 2022

Business Environment: Definition, Features, Types, and Factors

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Table of Content


A business environment can make or break your business. Building a reliable business environment matters if you are marketing products/services to clients. Businesses cannot function in an isolated gamut and require teams to work together towards a common goal. 

Businesses thrive on the basis of the environments they are built upon, and a business that remains relevant continues to operate actively and interact with the environment. The business environment can be described as a backdrop of conditions which makes it favourable for companies to thrive and succeed.

Did you know?

If a business environment is bad or not implemented correctly, the organisation is at high risk of failure.

What is a Business Environment?

A business environment is an ecosystem which consists of factors, people, and resources used to manage operations and problems and deliver solutions to clients. Activities related to supply chain management, logistics, HR recruitment, economic changes, market analysis, company ownership, etc., are included in this.

Business environments may directly or indirectly affect how a company runs, thus impacting the corporate culture of the place. Many internal and external factors affect business environments, and good business environments help identify new revenue opportunities and improve their overall business planning, performance, and profitability.

Also Read: Successful Retail Business Ideas - Which is the Best Retail Business in India?

Types of Business Environment

The main types of business environments are as follows:

1. Micro Environment

A microenvironment can be described as a collection of elements that affect the functioning of the business. It's completely internal and does not include third parties and external vendors.

2. Macro Environment

When a business environment lies outside the market and microenvironments, it is called a macro business environment. Gross Domestic Product (GDP) Inflation, employment rates, expenditure, and monetary/fiscal policies are a part of macro environments.

3. Market Environment

A business's market environment combines internal and external factors that influence an organisation's marketing activities. It determines their business strategy and may involve launching specific campaigns for increased customer acquisition and sales.

4. Natural Environment

Natural environments refer to a collection of natural resources used by businesses to conduct operations.  For example, if a business deals with manufacturing, its natural environment would work with elements such as:

  • Where the organisation procures raw materials/goods from?
  • How to deal with natural disasters such as forest fires, tsunamis, and floods
  • What products are made using natural materials?
  • Steps the business takes to reduce carbon footprint and give back to the environment.

Also Read: What Is Business Structure & Learn How to Choose a Business Structure

Features of Business Environment

The features of the business environment can be described as follows:

1. External and Internal Forces

A business environment is created as a result of internal and external forces working together in totality. External forces can be defined as the key stakeholders whom the organisation comes into direct contact with. Stakeholders are committed to the organisation's growth and stay invested in the journey. 

The company's top management is collectively described as internal forces and members defining the corporate culture. Middle-level managers are responsible for making important decisions and establishing a level of trust among subordinates.

Other specific forces that are closely tied to business environments are investors, competitors, suppliers, and customers. They also influence the company directly and play a role in running day-to-day operations. 

2. Uncertainty

It is very difficult to predict what could happen in the future, especially when multiple changes are taking place. As in the case of technology trends, many customers choose to use smartphones instead of logging in from their laptops to view websites. An organisation's business environment or online business strategy can change due to this. 

Other examples of uncertainty are when products become obsolete, and customers move on. A classic example is women who prefer fusion wear in the fashion industry and those who opt out of buying traditional attires these days. You can apply this to different industries, business models, and types of business.

3. Complexity

Good business environments consist of numerous moving components and cannot be classified into one category. Many dynamic and interrelated forces work in tandem, and it can be difficult to understand how many variables make it up. A relative influence is given by each component on the entire enterprise, which means it's easier to understand when you look at every part individually. 

Every element of a business environment has its own features and characteristics. Removing a part could impact the organisation or improve its functioning, depending on what its role is in the system.

4. Relativity

The business environment is subject to relativity and can differ from nation to nation. What's viewed as a unique business environment may seem a failure in other countries. 

For example, there is high demand for traditional outfits in India, but this demand is dwindling in Japan. Another instance is the shift from soft drinks to fresh organic juice by beverage companies worldwide.

Also Read: How to Expand a Business - 18 Strategies for Quickly Expanding a Business

Business Environment Factors

Managing business environments requires continuous monitoring and consideration of operational planning, changes, and different variables. Several internal and external factors are involved and how to influence company decisions.

Below is a list of the six key factors that affect business environments.

1. Technological Factors

As a company develops its business model, it may experience a sharp decline in sales if it doesn't keep up with the latest technology trends. 

For example, if businesses are shifting to eCommerce models and brands are stuck taking offline orders, they will lose revenue. Another instance is a company that manufactures GPS navigation for automobiles. The brand may suffer in sales if they stick to only catering to car companies and don't branch out to mobile devices and other sectors.

Technology is not limited to sales and can influence communications, billing, inventory management, and business operations too. Companies that are leveraging automation to eliminate manual tasks will operate more efficiently than those working in traditional ways.

2. Political and Legal Factors

Political and legal factors influence how a business operates in that region and whether or not it can continue functioning. Companies have to follow modern legislation policies, and those that do not will have to modify their processes in order to stay compliant. Some policies that affect companies range from taxation, import restrictions, intellectual property laws, employment laws, and tariffs.

3. Demographics

Companies need to evaluate the demographics of their audience and ensure they are marketing the right products to them. If customers do not get benefits and pain points aren't addressed, they cannot make the most of offerings.

Some demographics that impact business workflows are age, gender, location, nationality, marital status, income level, level of education, and race. An example of demographics in action is when a mobile company targets only a section of the population with a plan, such as those in the college level age with exclusive offers. Another example, when they target businesspeople and professionals with another offer.  Nowadays, people of all ages use telecommunications devices, and the technology landscape has changed.

4. Competitive Factors

Businesses can study their competitors, learn about the latest market trends, and stay ahead of the competition. By remaining relevant in the industry and providing the best services to clients, they can continue growing and not worry about losing revenue. Information collected about the market/competition can deliver insights into their processes. It teaches how to improve products and processes and implement the right strategies for marketing goods.

5. Social Factors

Where customers live influences their decision to spend money on a company that sells specific goods/services. If a business wants to succeed with the crowd, it must understand where the people are coming from. Social factors include current events, societies, and local communities. 

Businesses consider social movements and factors to make products more appealing to customers. They have to cater to customers' specific preferences, values, and ideals to stay relevant.  

For example, a company that sells products for women must be able to connect with other women's emotional or financial values. It should focus on customer satisfaction and make lives easier for female buyers.

6. Global Factors

Global factors influence how a business deals with domestic and international issues. Social and cultural norms are tied to global factors, and business leaders need to develop the right training programs for employees. Business firms aim to develop a good array of products/services. Without being aware of global challenges, this is not possible. The more customer economic status and global issues are considered, the better the quality of products becomes. Additionally, it makes the business approachable to larger audiences and expands upon targeted demographics.

Conclusion:

Business environments bring many job opportunities to employees and help firms deal with a variety of challenges, pitfalls, and setbacks. They prepare them for the future, teach them how to properly utilise resources, and cope with difficulties.

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FAQs

Q: What are the top tools used for business environment analysis?

Ans:

The top tools used for business environment analysis are - Pestel Model, SWOT Analysis, Porter's Five Forces Model, and Global Competitiveness Index. 

Q: What is the impact of a business environment on an organisation?

Ans:

A business environment can affect the operations of a company, influence processes, and affect key decisions made by managers or stakeholders. It dictates how fast a company scales up and whether or not it is likely to succeed.

Q: Why is creating a business environment important?

Ans:

Creating a strong business environment is important because it teaches companies how to analyse competitors and run their operations better. It gives structure and meaning to their workflows, providing actionable insights on how to improve their processes.

Q: What are the 5 common types of business environments?

Ans:

The 5 common types of business environments are - the technology environment, economic environment, social environment, market environment, and natural environment.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.