12 min read
Mathew Wahome
Topic 2: Business Environment
1. Meaning
The business environment is the sum of all internal and external factors that affect the way a business operates.
2. Internal Environment
Factors within the control of the business:
- Owners and shareholders
- Management and organisational culture
- Employees
- Finance and equipment
- Business objectives
3. External Environment
Factors outside the business's control.
a) Micro (Immediate) Environment
Customers, suppliers, competitors, financial institutions, the public.
b) Macro (General) Environment
| Factor | Examples | Effect on business |
|---|---|---|
| Political | Government policies, stability, elections | Stability attracts investment; instability harms trade |
| Economic | Inflation, interest rates, income, taxes | Affect costs, demand and profits |
| Social / Cultural | Customs, religion, population, tastes | Influence what products are demanded |
| Technological | Internet, mobile money, machines | Improve efficiency and create new markets |
| Legal | Licences, consumer protection, labour laws | Set the rules businesses must obey |
| Natural / Ecological | Climate, rainfall, soils, minerals | Affect production and location of business |
4. Importance of Understanding the Business Environment
- Helps identify opportunities and threats.
- Assists in planning and decision making.
- Helps a business adapt to change.
- Helps in complying with laws and regulations.
- Improves competitiveness.
5. Ways Businesses Respond to Environmental Changes
- Adjust prices and products.
- Adopt new technology.
- Train staff.
- Lobby the government or form associations.
- Diversify to spread risk.