Nobody was prepared for what the year 2020 was going to throw at them. As the COVID-19 pandemic hit, businesses around the world were badly affected. Many failed to navigate financial and operational challenges and therefore shut shop. However, there were businesses that learned to reinvent and recover.
The pandemic is an ideal example of how societal factors (such as a virus outbreak) have the power to negatively impact businesses to a great extent. Businesses function and continue to evolve in dynamic environments. Read on to learn more about the meaning of a business environment and how it influences daily functioning.
What Do You Mean By A Business Environment?
Businesses don’t operate in a vacuum but in a dynamic environment that influences how they operate and achieve their objectives. A business environment refers to a set of forces within and beyond an organization that affects the way it functions. It’s the collection of stakeholders, entities and other significant internal and external factors that impact the performance, productivity, growth and even survival of a business.
There are two key types of business environments—internal and external. Business owners and managers exert significant influence over day-to-day decisions and internal situations. On the other hand, external factors that are economic, social, technological, political and legal create unique challenges and opportunities that influence the organization.
An external business environment can be further classified into:
It has a direct and continuous impact on the business. It includes customers, suppliers, competitors and intermediaries
It affects the performance and functioning of businesses in general and comprises geographic, socio-cultural and other factors
What Are The Features Of A Business Environment?
An organization is part of a broader social system, which is why it has to work within a framework that’s essential for its survival. Here are the different salient features that define a business environment:
A business environment is constantly evolving because there are various factors responsible for changing its shape and character. Many organizations need to respond to industry demands to stay ahead in the game. For example, the FMCG (Fast Moving Consumer goods) sector is focusing on herbal and vegan products to meet their demands.
There are many forces involved in influencing a business environment at any given time. For example, there may be an external incident that creates an internal conflict within the organization and that further affects the overall productivity.
You never know what’s around the corner in business environments influenced by multiple factors. There may be risks that you’re not even aware of.
The different forces interact with each other and most of them are even interrelated. For example, the COVID-19 pandemic increased the sales of masks and sanitizers.
As different stakeholders and entities are part of an organization, everyone views a single change differently. There are multiple perspectives and perception varies from one person to another.
The survival and growth of organizations depend on environments in which it exists. More often than not, even the smallest change can create a ripple effect and affect the organization in multiple ways. In other words, changes—big or small—have a far-reaching impact.
A business environment is relative and it differs from one location to another. For example, an organization will operate differently in Chinese markets as opposed to Indian ones. The market factors and consumer demands will influence the business.
The Various Forces Driving A Business Environment
As we’ve already established, a business environment is a sum of multiple factors and forces influencing business activities. Let’s look at these core factors in greater detail.
It refers to the various socio-cultural factors in which a business exists and grows. It includes the following elements:
Festivals like Diwali and Christmas create financial opportunities for several market segments like clothing, food and gifting
It refers to beliefs and long-held principles such as freedom, equal opportunities and social justice that exist in society
General or development changes like literacy, habits and fitness trends influence businesses in multiple ways, which is why it’s crucial to respond to growing industry demands
It refers to the rules, regulations and acts that influence business activities. For example, the government exerts significant power over multiple industries such as tobacco and alcohol. An alcohol manufacturer should use labels that say ‘consumption of alcohol is injurious to health’.
The various economic factors driving business functions and success include
When the consumer income increases, the demand for products and services also increases
An increase in the inflation rate leads to a price hike that reduces the demand for goods and services
Government and business policies such as import duty, export duty and corporate tax rates affect businesses to a great extent
A government’s relationship and attitude towards businesses also impact the way they function. It’s crucial for the survival of an organization. Both central and local government policies and sanctions exert influence. The government also impacts employment, and import and export of products.
It refers to the scientific innovations and technological advancements that enhance the quality and relevance of goods and services. Several traditional businesses often collaborate with technologically-advanced enterprises and consultancies to improve business strategies. For example, a consultancy helps fast-food outlets create a customized mobile application for efficient business operations.
The Importance Of Business Environments
There is a symbiotic relationship between a business and its environment. A business environment analysis will help you understand what’s happening both inside and outside an organization. It’ll further help you prepare for any risks or opportunities you may come across in the future. Here are several reasons why you must pay attention to business environments.
Communication and collaboration are the cornerstones of business success. Understanding your business environment helps you gauge needs and expectations, making it easier to make decisions. It further leads to the effective management of employees as everyone’s on the same page and shares similar thoughts for promoting business success.
When you pay attention to internal and external factors, you’re better aware of the changing market demands. It pushes you to think outside the box and engage in innovative thinking. If you want to have a competitive edge in the market, you must encourage creativity among employees.
Optimum Use Of Resources
An effective environmental assessment helps you utilize available resources. You understand what’s advantageous for your business and what’s not making a difference. For example, if a department isn’t bringing in the necessary profits, you can decide to shut it down and dedicate your business efforts to other areas.
Assessing business environments is essential for effective decision-making. The ability to pick the best alternative among various choices is crucial for successful strategy implementation. It further contributes to an organization’s success and growth.
The biggest advantage of studying business environments is the ability to foresee risks and take measurements to control or mitigate them. It helps you collect data and take active measures against surprises that may negatively impact your business.
How To Study And Analyze Your Business Environment
Environmental scanning helps identify rapid changes and opportunities necessary for your organization’s survival and growth. A SWOT (Strengths-Weakness-Opportunities-Threats) Analysis can help you identify the influencing factors responsible for changes. Here’s how you can scan and study your business environment and prepare yourself for unforeseen circumstances.
Identifying strengths helps you identify what works best for your organization. This way, you can improve existing plans and policies while optimally using available resources.
It means that you determine the limitations of your business. It helps you work towards improvement and take active measures towards driving change. Monitoring the internal environment helps to identify weaknesses efficiently.
Identifying opportunities gives you a competitive edge over other products and services in the market. You must always keep a lookout for beneficial opportunities.
Early identification of threats is always useful in mitigating damaging consequences that’ll negatively affect your organization. Have checks and balances in place to study potential threats and always stay prepared.
In order to make active changes in your business environment and align your business goals, take time to understand how your internal environment functions. Harappa Education’s Navigating Workplaces course will help you assess your workplace culture and navigate interpersonal relationships among different teams. The Culture Fit tool will help you evaluate your alignment with your organization. The Power Structures framework will guide you in identifying the different types of powers people hold. Understand the nature of your business in order to influence it!
Explore Harappa Diaries to learn more about topics related to the COLLABORATE Habit such as What is Risk Management, Organizational Structure, Types of Organizational Structure and Organizational Behavior to ensure smooth functioning of work and workplace.