Business Environment

Concept of Business Environment

A business firm is an open system. It gets resources from the environment and
supplies its goods and services to the environment. There are different levels
of environmental forces. Some are close and internal forces whereas others
are external forces. External forces may be related to national level, regional
level or international level. These environmental forces provide opportunities
or threats to the business community. Every business organization tries to
grasp the available opportunities and face the threats that emerge from the
business environment.

Business organizations cannot change the external environment but they just
react. They change their internal business components (internal environment)
to grasp the external opportunities and face the external environmental
threats. It is, therefore, very important to analyze business environment to
survive and to get success for a business in its industry. It is, therefore, a vital
role of managers to analyze business environment so that they could pursue
effective business strategy.

A business firm gets human resources, capital, technology, information,

energy, and raw materials from society. It follows government rules and
regulations, social norms and cultural values, regional treaty and global
alignment, economic rules and tax policies of the government. Thus, a
business organization is a dynamic entity because it operates in a dynamic
business environment.

System Approach of Business Environment

All the systems are subsystems of other system in the nature except the
supra-system or cosmos. We individually are also the part of our family.
Formal organization or business is made of group of people for specific
purpose. Very similar to the organization we personally are the members of
our family and that is a component of a broader society. The same society is a
component of a nation. Group of nation with similar interest are grouped in
regional alliances such as SAARC and EU. World economy is made of with all
these regional alliances and network.

In this approach, nothing is in isolation. All are integrated and interlinked.

Organizations are open systems because they get resources from others and
give output to others. A business deals with number of business
kenvironmental forces. These forces from where a business gets resources
and supplies resources, forces that influence the business operation, and
factor that present opportunities and threats are taken as the business
environment.
In this sense, a business can be viewed as an internal system or controllable
system of a manager or strategist. Managers can control their own
businesses. Managers can collect resources such as capital, human,
information, idea, land, and equipments. These components are controllable.
 Managers can operate their organization and use their decision to run it.
Similarly, the output of the organization is also under their control. But, other
broader systems that cover the business may not controllable.

Group of similar organization becomes an industrial system that comprises

business organizations as its subsystems. Industry level environment is
common to all the businesses running within the industry. A country and its
environment is broader system that covers even the different sectors or
industries such as banking, education, health, trade, manufacturing, and
service industries. Therefore, it affects all the business operations inside the
nation. Regional alliances influence the national policy because a country is a
subsystem of the regional alliances such as SAARC and BIMSTEC. Even
such regional alliances are also affected by the broader international systems
such as WTO and United Nations. Relatively broader systems are
uncontrollable for any subsystems. In case of a business, it is a very small
subsystem that should follow the industry norms, national policies, regional
agreements, and global systems.

In summary, it can be concluded that a business and its internal areas are
controllable for a manager but other broader systems control the businesses.
Therefore, the strategy for a manager is to control internal areas and react
with the external forces to grasp the opportunity and face the threats
presented by the external environment. This system approach can be
classified into three environmental groups: uncontrollable, semi-controllable,
and controllable that is further detailed in the following section.

Components of Business Environment

A manager must follow a change in his or her structure, strategy and policies
in response to the changing environmental forces. Thus, a business firm exists
in two level of business environment a) Internal and b) External. Internal
business environment comprises internal structure, system, culture, staff, and
resources of the organization. This is sometimes identified into the internal
functional areas such as marketing-distribution, finance accounting, human
resources, production-operation, and research-development. All these
business environment components are controllable.

External business environment comprises two layers that are task business
environment and general business environment. Task environment is also
known as close or industry level business environment. Such environment
more directly interacts with the business operation and semi-controllable in
nature. Next layer is relatively broader and more indirect in nature that covers
the effect of environment emerged at national, regional, and international level.
Therefore, the business environment figure is presented in three layers.

Business environment comprises internal components of a business, which is

manageable at managerial level. Internal business environmental forces are
the components of the business. As discussed before semi-controllable and
uncontrollable environmental forces are external business environmental
forces. These forces can be classified into two levels: industry level and
 general level. These general environmental forces may exist at national,
regional and international level. The internal environment or business
components are surrounded by industry level environment and the industry
level business environment is surrounded by general level business
environment.

Various Approaches of Identifying and Reporting Environment Components

There are many distinct but similar approaches available in categorizing

business environment components. Jauch & Glueck (1988) identified business
environment components into three sets namely general, industry level, and
internal. This concept became very popular and holistic among the many
academicians. They identified five major components including political-legal,
socio-cultural, economic, technological, and climatic factors of general
business environment. Industrial and general level business environment are
grouped into external business environment.

Many writers coined Political, Socio-cultural, Economic, and Technological

factors as PEST.1 Political and legal components are sometimes separated
and PESTEL is also used as an acronym. Some others address these external
environment components as Social, Technological, Political, and Economic
(STEP) factors. Including natural environmental factors into this set social,
technological, economic, environmental and political (STEEP) model is
presented. The same natural environment is also taken as a distinct
component; therefore, it is sometimes addressed as Socio-cultural, political-
legal, Economic, Natural, and Technological (SPENT).2 Cartwright identified
an acronym SPECTACLES to address the set of ten external environment
components such as Social, Political, Economic, Cultural, Technological,
Aesthetic, Customer, Legal, Environmental, and Sectoral.3

External business environment are grouped into remote environment for

general and operating environment for task or industry level business
environment.4 General business environment is also used as macro-
environment. Similarly the industry level environment is used as the micro-
environment in many writings.5 Furthermore, industry level business
environment is also taken as competitive environment.6 Some writers even
merged competitive environment into a set of external or general
environment.7

General Business Environment Components

A variety of factors can affect company's business. Such factors can be

national level, regional level, and international level environmental forces.

1
see Johnson & Scholas, 2003.
2
e.g. Campbell, Stonehouse, and Houston, 2002 p.118, Pettinger, 1996
3
Cartwright, R. (2002). Mastering the Business Environment. London: Palgrave Macmillan.
4
see Pearce & Robinson, 1998, p 99
5
Campbell, Stonehouse, and Houston, 2002; Haberberg & Rieple, 2001
6
e.g. Dobson, Starkey, and Richard, 2004, p. 19; Miller, 1998, p. 76.
7
see David, 2003, p. 94
These factors are also known as societal factors or macro level business
environment factors. In general, five forces are taken as the general
environmental factors namely economic, socio-cultural, political-legal,
technological, and international. Some writers included natural environment
as a distinct component but the growing social awareness on natural
environment shows that this component can be included into the socio-cultural
environment.

Set of these environmental factors is mostly referred by first four factors PEST
(Political-legal, Economic, Socio-cultural, and Technological). The logic behind
this is pervasiveness of the international environment because it affects all
these four sectors. Fast growing technological development, outsourcing
business, emergences of multinational companies, and global and regional
alliances have made the world a global village. In this context, effect of
international environment in four major components of general environmental
factors is natural. In today's dynamic business environment Information
Communication Technology (ICT) revolution and globalization are to be
considered very important effect in today's international business environment.

Growing multinational companies and their influence in one national economy

is clearly evident. Use of automated technology and e-commerce has replaced
many of the manual works and workplace. World Trade Organization and its
growing members including Nepalese 147th membership in Cancun summit
has placed new opportunities and threats to the developing countries like
Nepal. South Asian Association for Regional Cooperation (SAARC) is active
since twenty years and it recently declared South Asian Free Trade Area
(SAFTA) charter. Furthermore, Bay of Bengal Initiative for Multi-Sectoral
Technical and Economic Cooperation (BIMSTEC) and its future potentialities
presented new prospectus to the local and international business entities in
this sector.