MODULE 8: BUSINESS ENVIRONMENT

8.0. Introduction
You are welcome to another week when we shall consider another topic. In this Module, you will learn
about the internal and external factors that affect business organisations either positively or negatively.
At the end of this module, you should be able to list and explain these factors that can provide
opportunities or pose threats to your business.

We recommend that you complete the quiz at your earliest convenience. By doing so, you will still
have time to seek help if you encounter any problems. It will also help to avoid system overload with
last-minute submissions.

8.1. Business Environment

Business environment describes the settings in which the business operates and comprises of internal and
external environments.
The internal environment refers to all factors within the organisation that impact strengths or create
weaknesses of a strategic nature. They are the physical and social factors within the boundaries of the
organisation that are taken into account in the decision-making process. Examples are specific
technologies utilised; size, types, and quality of personnel in the organisation; the administrative units;
organisation goals and objectives, mission and vision statements; and nature of the organisation’s product
or service.
The external environment includes all the factors outside the organisation which provide opportunities or
pose threats to the organisation. The external environment can be classified into technological
environment, economic environment, legal and political environment, social and cultural environment,
as well as global or international environment.
a) Technological environment: Technology is understood as the systematic application of
scientific or other organised knowledge to practical tasks. Technology changes fast and to keep
pace with it, businessmen should be ever-alert to adopt changing technology in their businesses.
b) Economic environment: There is a close relationship between a business and its economic
environment. The business obtains all its needed inputs from the economic environment and it
absorbs the output of business units. Economic factors include financial, labour, competitors,
suppliers, productivity levels, etc.
c) Legal and political environment: It refers to the influence exerted by the three political
institutions which are the legislature, executive, and judiciary, in shaping, directing, developing,
and controlling business activities. A stable and dynamic political environment is indispensable
for business growth.
d) Global or international environment: Liberalisation of the economy has forced businesses in
the countries of the world to view business issues from a global perspective. Hence, business
responses and managerial practices must be fine-tuned to survive in the global environment.
e) Social and culture Environment: It refers to people’s attitude to work and wealth; the role of
family, marriage, religion, and education; ethical issues and social responsiveness of business.

8.2. Environment – Business Relations

A business enterprise is not a closed system, it interacts with forces both within and outside its boundaries,
which also in return impacts the business enterprise. Business, an economic pursuit of man, continues to
be dictated by nature.
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Three features are common to this web of relationship between business and its environment:
➢ There is a symbolic relationship between business and its environment and among environmental
factors. In other words, business is influenced by its environment and in turn, to a certain degree,
will also influence the environment. This type of relationship is called environmental probabilism-
strategic adaptation.
➢ The second type of relationship is environmental determinism. In this type of relationship, forces
within the environment are dynamic and strong. The forces shape the happenings in the business,
and as the forces keep changing so also does the business.
➢ The third feature is that a particular business firm, by itself, may not be in a position to change as
the environment changes. But along with other firms, businesses will be in a position to mould
the environment in their favour. This type of relationship is called environmental possibilism.
However, the environment in which an organisation exists can be described in terms of the strengths and
weaknesses existing in the internal environment and the opportunities and threats operating in the
external environment.
The four environmental influences can be described as follows:
a) Internal Environment
• Strength is an inherent capacity that an organisation can use to gain strategic advantage.
Examples of strengths are goodwill, resources, assets, people, experience, knowledge,
information, and capability.
• Weakness is an inherent limitation or constraint which creates strategic disadvantages. Examples
of weaknesses are gaps in capabilities, low morale, over-dependence on a single product, financial
deadlines, and illiquidity to mention but a few.
b) External Environment
• Opportunity is a favourable condition in the organisation’s environment that enables it to
consolidate and strengthens its position. Examples of opportunities are economic boom,
favourable demographic shifts, the arrival of new technologies, fostering of regulations,
favourable global influences, expanding markets, and unfulfilled customer needs.
• Threats are the unfavourable or negative condition in the organisation’s environment which
creates risk or causes damage to an organisation. Examples of threats are economic downturn or
recession, new competitors, unexpected and negative shifts in consumer tastes, political
instability, unfriendly legislations and laws, and new technology.

8.3. Environmental Analysis Process

The analysis consists of four sequential steps:
(i) Scanning: It involves general surveillance of all environmental factors and their interactions in
order to identify early signals of possible environmental change; and detect environmental
change already underway.
(ii) Monitoring: It involves tracking the environmental trends, sequences of events, or streams of
activities. It frequently involves following signals or indicators unearthed during environmental
scanning.
(iii) Forecasting: Strategic decision-making requires a future orientation. Naturally, forecasting is
an essential element in environmental analysis. Forecasting is concerned with developing
plausible projections of the direction, scope, and intensity of environmental change.
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 (iv) Assessment: In assessment, the frame of reference moves from understanding the environment-
the focus of scanning, monitoring, and forecasting – to identifying what the understanding means
for the organisation. Assessment tries to answer questions such as what are the key issues
presented by the environment, and what are the implications of such issues for the organisation.
A good example is the SWOT analysis. That is: S – Strengths; W – Weaknesses; O –
Opportunities; T – Threats

8.4. SWOT Analysis

Organisation performs SWOT analysis to understand their internal and external environments and to
match the strengths and weakness existing within an organisation with the opportunities and threats
operating in its environment so that an effective strategy can be formulated.
An effective organisation strategy is one that capitalises on opportunities through the use of strengths and
neutralises threats by minimising the impact of weaknesses to achieve pre-determined objectives.
A simple application of the SWOT analysis technique involves the following steps:
(i) Setting the objectives of the organisation or unit.
(ii) Identifying its strengths, weaknesses, opportunities, and threats.
(iii) Asking four questions:
• How do we maximise our strengths?
• How do we minimise our weaknesses?
• How do we capitalise on the opportunities in our external environment?
• How do we protect ourselves from threats in our external environment?
(iv) Recommending strategies that will optimise the answers to the four questions. That is, one that
maximises the potential of the strengths and opportunities while minimising the impact of the
weaknesses and threats.