What Is A Business Environment? (Benefits And Examples)

By Indeed Editorial Team

Published 2 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

There are several internal and external factors that can influence a company's business decisions. Different combinations of these factors, like price, social changes and regulatory changes, can influence the overall environment where a business operates. Kowing how these factors affect a business environment can help you adapt to changes and manage a company's daily operations and resources better. In this article, we answer the question, 'What is a business environment?' discuss its different types, share an example of each type and explain why it is important to understand business environments.

What Is A Business Environment?

The answer to "What is a business environment?" is that it is the sum of all external and internal factors that impact a business and its operations. Internal factors are those components that exist within the company and external factors are outside causes that influence an organisation's functioning. The business environment indicates the totality of all the individuals, resources, stakeholders, institutions, regulations and market forces that subsist around the organisation.

Related: 20 Business Skills You Need And How To Improve Them

Why Is It Important To Understand A Business Environment?

Here are some of the main reasons it is important for the decision-makers of a company to understand what is a business environment:

  • It improves the organisation's performance as it enables its ability to adapt to changing circumstances. The organisation can capitalise on positive changes for more success, while negative changes can prompt it to work better as a unit to minimise the adversity.

  • It may help the organisation identify potential opportunities and threats. By keeping track of the business environment, decision-makers can identify the best way to take advantage of opportunities and recognise potential risks.

  • It helps the organisation effectively utilise its resources. By understanding the business environment, an organisation can direct its physical, financial and human resources in an optimum manner and avail them to create the outputs it desires.

  • It helps an organisation with its planning and policies. An organisation can create strategies around the business environment and put them into action through key changes at a policy level.

  • It helps the organisation adapt and cope with rapid changes and enables it to manage its affairs dynamically. By keeping track of the business environment, an organisation can remain flexible in its approach and adopt new technologies and ideas.

  • It helps the organisation remain competitive. An understanding of the business environment helps it identify its small and large competitors and highlight its differentiating factors to customers.

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Types Of Business Environments

Understanding the types of business environments and their differentiating factors can help an organisation understand their significance and manage their complexities. Below are some common types of business environments with examples of each:

Internal business environment

The internal business environment includes all those aspects and recognisable factors that exist within an organisation or business. It includes underlying components that characterise and have an influence on the organisation like the work culture, human resources, management hierarchies, value systems, physical assets, brand image, strategies and policies. Usually, the forces that exist within the internal business environment are within the control of the organisation.

Example: A company that builds furniture is looking to expand its product line and make wooden toys for children. It restructures a part of the operational team and hires a marketing agent who specialises in children's products. To utilise its resources effectively, it adopts a unique strategy to make use of the leftover material from its furniture and buy the necessary raw materials from the nearest local supplier.

Economic environment

The economic environment is the culmination of all the economic factors within which the organisation exists. It refers to all aspects of the local and global economies that may have an impact on the business and its operations. Usually, these factors are beyond a business's control. They may include economic conditions like per-capita income, the country's economic policies, interest rates, inflation, currency exchange rates, taxes and the purchasing power of consumers.

Example: A palm oil exporter is seeking new destinations and wants to trade in countries that offer favourable export duties. The exporter proceeds with its plans with a test run and sends a consignment to a country with a good exchange rate. With a profitable margin, the exporter sells their goods to local retailers who are looking for vegetable oil alternatives.

Technological environment

The technological environment refers to the technological factors that influence the production of goods and services. It is usually all-pervading and can impact an organisation's internal and external environments. The technological environment may include aspects like scientific advancements, technology adoption, transfer of technology, research and development, technology costs and the impact of technology on humans.

Example: With the emergence of the internet and developments in smartphone technologies, social media companies are generating higher revenues from targeted advertising and the sale of metadata. With this shifting trend, companies that use conventional marketing strategies like print, broadcasting and telemarketing have come up with parallel strategies to shift to digital marketing avenues to ensure they stay relevant.

Socio-cultural environment

The socio-cultural environment refers to the societal and cultural factors that are characteristic of a place. An organisation's socio-cultural environment includes the demographic attributes, values, customs, beliefs, norms, life expectancy rate and social forces of the community in which it exists. As social and cultural movements shape the market, they have a considerable influence on businesses operating in that location.

Example: As more organisations and businesses offer flexible work arrangements, there is an increase in demand for products like work chairs, desks, laptops and network devices. There has also been a slight shift in trends regarding food habits, and food delivery companies are noticing a drop in sales as more people prefer cooking at home. To offset this, they may consider lowering their prices and offering discounts on purchases.

Competitive environment

An organisation's competitive environment refers to competitive forces that affect the market and how these changes can impact business. This may include large and small competitors whose dynamics can impact a business favourably or otherwise. Usually, the competitive environment is subject to statutory regulations.

Example: A premier clothing brand is seeing a rise in fast-fashion trends, and its small competitors are leveraging from replication and the production of high volumes of clothing made from low-quality material. Noticing the competitive pricing, it decides to lower its premium prices. It also launches a campaign that highlights the importance of sustainability and ethical fashion.

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Legal environment

The legal environment that exists around a business includes statutory factors and legal forces that may influence its operations. The legal environment provides the framework for the business to operate through processes that facilitate and regulate its activities. This includes laws put in place by the government, rules made by legal bodies, regulations, clearances, provisions and contractual laws that relate to the business.

Example: To ensure that they act in accordance with the law and conduct their activities fairly, companies may want to adhere to consumer protection laws that ensure equity of treatment. This ensures that they do not indulge in activities like providing misleading descriptions and faulty products. It also provides an avenue for customer grievances and compensation.

Political environment

The political environment consists of forces and activities that relate to governmental and political bodies that may have an impact on businesses. Usually, the political environment in which a business exists is interwoven with its social, economic and legal environment. The political factors that can influence a business include political stability, ideologies, governmental policies, lobbying, legislative processes, political structures and attitudes towards the business community.

Example: A car-manufacturing company is looking at expanding its base overseas. It decides the best course of action is to lobby in countries whose fiscal policies promote a free market economy. To ensure a hassle-free investment, the company deploys a research team to investigate the nature of the place, privatisation laws, levels of bureaucracy and law enforcement.

Natural environment

The natural environment in which a business exists includes ecological and geographical factors that may influence its activities. Natural factors like geography, climatic conditions, the availability of resources, air quality and environmental regulations greatly affect the functioning of a business. It is a key macro aspect that ultimately determines how the business interacts with inputs like raw materials and if the output is conducive to its natural environment at large.

Example: Developing countries that witness no drastic changes in weather and relatively high temperatures usually encourage businesses to invest in solar technologies to harness the energy of the sun. Businesses also take adequate measures to ensure their agricultural activities do not get overly dependent on water-intensive crops, such as sugarcane and paddy, as this could potentially deplete the groundwater resources.

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