THE BUSINESS ENVIRONMENT

2.1 Meaning of business environment

A business environment generally refers to the sum total of those factors or variables that may
influence the survival of an organization. Therefore, a firms’ business environment refers to
forces that affect business managements’ ability to develop and maintain successful
transactions with its target market.

The business environment is uncertain and ever changing. It offers both opportunities and
threats. An opportunity is a favorable condition or trend in the business environment that can
be exploited to advantage by a deliberate management effort. On the other hand, a threat is
an unfavorable condition or trend in the business environment that can lead to the failure of
a firm if a deliberate action is not undertaken by management.

The company must therefore use research and intelligence systems to scan and monitor the
changing environment. To be successful, a company must adapt its business strategies to the
trends and developments in these environments.

Though there are various approaches to analyzing a firm’s business environment, for our
discussion, we will adopt the framework that conceives the environment as mainly consisting
of two parts, namely the micro environment and the macro environment.

2.2 The company’s micro environment

This consists of the forces close to the firm that affect its ability to serve its customers and
includes such forces as the internal company operations, suppliers, intermediaries,
customers, competitors and the publics. Since these forces are close to the firm, it has more
control over them and can be quite active and even proactive when dealing with them.
Let’s now discuss the key issues in the firm’s micro environment.

2.2.1 The internal company operations

This generally represents the company’s profile that depicts its weaknesses and strengths
in terms of its skills and structure. When making business plans, the firm’s business
management has to take into consideration the capacity and requirements of other
internal functional departments such as finance, accounting, research and development,
human resources purchasing and production. All these departments have an impact on
the success of the business department’s strategic plans as they provide resources and
leverage on business activities.

2.2.2 Suppliers

These are firms and individuals who provide the inputs needed by the company to
produce its goods and services. The inputs provided are mainly materials, capital and
labour. Supplier developments can seriously affect business. If the firm cannot obtain the
 right inputs of the necessary quality in the right quantity and at the right price for the
achievement of its business objectives, then it cannot hope to realize any success in a
competitive market. Business managers must therefore watch supply shortages or delays,
labor strikes and other events which can affect sales and damage customer goodwill.
Business managers also need to monitor the price trends of key inputs since rising supply
costs may force price increases that can harm the firm’s competitiveness.

2.2.3 Business intermediaries

Intermediaries help bridge the gap between the firm and its customers. They include
wholesalers and retailers who buy and sell the company’s goods. They may also help the
company stock or move goods from their points of origin to their destinations. In so doing,
the wholesalers and retailers add value to goods and services by providing time, place
and possession utilities and thereby enable the exchange process between the firm and
the customer that would otherwise not have been possible to take place.

Intermediaries also include business research firms, advertising agencies, media firms and
business consulting firms that help the company target and promote its products to the
right markets as well as financial and risk management firms such banks and insurance
companies that help finance transactions or insure against risk associated with buying
and selling of goods.

2.2.4 Customers

Customers are the individuals and organizations that constitute the market for the firm’s
products and services. The company must study its customer markets closely since each
market type has special characteristics that call for careful understanding by the seller if
the firm is to develop competitive business strategies. In addition, the firm must be
conversant with the changing trends in customer preferences so that it can produce
relevant products and services.

The company can operate in the following types of customer markets:

o Consumer markets i.e. households or individual markets
o Industrial markets or organizational markets
o Institutional markets e.g. schools and government ministries
o International markets

2.2.5 Competitors

These are the firms that are in direct competition with the firm for customers. The
marketing concept or orientation advances that a company must satisfy the needs and
wants of customers better than its competitors if it is to survive in the market place.

Therefore, since every company faces a wide range of competitors, marketers must do
more than simply meet the needs of its target customers. They must also adapt to the
strategies of competitors who are serving the same target customers. Both large and small
 firms must develop business strategies that best position them against competitors in their
markets in order to survive.

2.2.6 The publics

A public is any group that has an actual or potential interest in a firm or its ability to
achieve its objectives e.g. the media publics, environmental groups, consumer
organizations, local public e.g. neighborhood and community organizations and even the
general public at large. Such entities can drastically effect a firms operations and the firm
should devise strategies of ensuring a harmonious co-existence with them.

Having reviewed the key issues in he firm’s micro environment, let’s turn our attention to the
firm’s macro environment.

2.3 The company’s macro environment

The macro environment consists of the larger societal forces that affect the whole micro
environment and includes demographic, economic, ecological, technological, political/legal and
social/cultural forces. These forces are mostly beyond the firm’s direct control and the best the
firm can do is to react or adjust to their dictations. Let’s review the main components of a firm’s
macro environment.

2.3.1 Demographic environment

Demography generally refers to the study of human population in terms of size, density, location,
age, race, occupation and other statistics. The demographic environment is of major interest to
managers because it involves people and people make up markets. Hence any significant changes
in the firm’s demographic environment affect its competitiveness either positively or negatively.

The recent past has seen the following demographic trends of interest to marketers:

 Changing age structure that is influenced by such factors as improved life expectancy
and reducing birth rates.
 Changes in family structures e.g. working mothers, non-family households e.g.
singles, divorcees, late marriages etc
 Geographic shifts in population e.g. rural-urban migration, movements from town
center to outskirts etc
 Better educated and affluent population.

These changes have resulted in the innovation and development of new products and services as
well as the demise of more traditional offers.

2.3.2 Economic environment

This consists of factors that affect consumer purchasing power and spending patterns. Total
buying power depends on current incomes, prices, level of savings and credit availability.
 Therefore marketers should be aware of the major trends in income and of changing
consumer spending patterns. Factors such as economic growth rate, levels of employment,
consumer incomes, and the rate of inflation as well as taxation levels determine the amount
of money people have to spend either positively or negatively.

In addition, marketers are also concerned with the nature of income distribution within a
market as this also affects spending patterns and product affordability. Important income
distribution classifications include:

a) Upper class consumers- their spending patterns are not affected by

current economic events. These a major market for luxury goods.
b) Middle class consumers- these are somewhat careful about their
spending but can still afford good life some of the time.
c) The working class- these must stick close to the basics of food,
shelter, and clothing and must try hard to save
d) The underclass e. g. persons on pensions and the unemployed who
must count their coins when making even the most basic purchase.

2.3.3 The ecological or physical environment

This involves the limited natural resources that are needed as production inputs by firms in the
form of raw materials and which are affected by business activities. Concerns about shortages of
natural resources and about damage and pollution to water, soil and air caused by industrial
activities have continued to grow over the years and this has led to emergence of environmental
lobby groups and legislation measures to protect the environment. For instance, in Kenya,
businesses have to comply with the national environmental management authority (NEMA)
regulations on environment safeguards. In particular all major business projects are required to
conduct an environmental impact assessment before being cleared for operations.

2.3.4 Technological environment

This consists of forces that affect production processes creating new products and business
opportunities. Technological innovations such as mobile phones, computers and the internet
have revolutionized the way business is conducted in all spheres of life from banking,
manufacturing to transport and communication.

Every new technology replaces an older one and when existing industries fight or ignore new
technologies their businesses decline. Companies that do not keep up with technological changes
soon find their products and services outdated. Such firms also miss out new and business
opportunities.

2.3.5 The political/legal environment

This consists of laws and regulations by government agencies that influence and limit various
organizations and individuals in a given society. Business decisions are strongly affected by
developments in the political environment. For instance, the influences by government by means
of legislation, taxation, annual budget, import controls, investment incentives as well as company
merger regulations have a direct impact on business practices. It is worth noting that as the
government has a key responsibility of protecting consumer welfare, much of the legislation is
usually enacted in order to protect companies from each other e.g. to ensure fair competition or
to protect consumers from unfair business practices such as poor quality products and deceptive
advertisements.

2.3.6 Social /Cultural environment

This is made up of institutions and other forces that affect societies’ basic values, faith, language,
perceptions, preferences and ultimately their behavior and conduct. A community’s culture is not
static but is greatly influenced by the other variables of the environment such as the economic
status, demographic trends and technological developments. An individual’s way of life is
therefore greatly influenced by social cultural variables thus directly affecting their consumption
preferences that are important to marketers.