The Business Environment

Chapter 2 L Khoo (Aug 2008) 1

The Business Environment
 The business environment of an organisation
refers to the elements that affect the
achievement of its aims.

 An organisation is in continual interaction with its

environment.

 As changes in the environment affect both its

inputs and outputs, it must be able to respond to
the opportunities and challenges posed by the
environment.

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Elements of the Business Environment

 There are two parts of the business environment –

external & internal environment.

EXTERNAL ENVIRONMENT

INTERNAL ENVIRONMENT

BUSINESS

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The business environment

 External Environment – refers to the
external forces that play a part in
influencing the direction that the
organisation takes.

 Internal Environment – refers to those

elements that have a direct influence on
the daily operations of the firm.

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External Environment
 5 basic elements : material, economic, legal-
political, social and technological.
material

technological BUSINESS economic

social Legal-political

Elements of the external business environment

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 Material

The material or physical element of the

environment is concerned with the use and supply
of land and raw materials, the danger from
pollutants and residues, and the availability of
energy resources.

Abuse of the material environment will mean that

organisations have to pay more for scarce
resources and face health hazards from pollution.

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 Material

The availability of raw materials in certain

parts of the world has determined the
location of industries.

E.g. when transport was relatively

expensive, steel industries were located
near places where iron ore, coal and
cheap labour were available.

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The orgaisation’s responsibilities to the material
environment are:

 To forecast accurately its resource requirements

especially when energy is becoming scarce.
 To use energy more efficiently.
 To reduce the levels of air, water and noise
pollution.
 To recycle water and other material where
possible.

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 Economic

The economic element of the environment plays a

very big role in determining the nature of business.
When times are good and a country enjoys full
employment, an organisation may find that it can
only expand by buying factors of production that
are becoming more expensive.

Thus to remain competitive, some organisations

have moved to third world countries where certain
resources such as labour are cheaper and more
readily available.
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 Legal-political

Legal:
The legal element of the environment is
concerned with the framework of rules laid
down by the government and within which
means business must operate.

Political:
Socialist policies work through the public sector
which is that part of the economy totally or
partially controlled by the government.
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 Social

Since business operates within society, it is of

utmost importance that the manager is aware of
the characteristics of the social element of the
environment.

The social environment creates market

opportunities.

E.g. Fast food restaurants have been very

successful and fashion companies have been
quick to exploit the desire for western clothes
and accessories.
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 Technological

It is the combination of the right technology and

marketing that leads to the commercial success
of products.

The technological element of the environment

also allows the manager to access to more
accurate data that enables him to plan better.

E.g. The technological changes in transport

have helped to lower the cost of moving goods
and opening new markets.

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Internal Environment
7 basic elements :

 Shareholder
 Customers
 Vendors / suppliers
 Competitors
 Trade unions
 Government agencies
 Financial institutions
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Internal Environment
shareholders

customers
Financial
institutions

BUSINESS vendors

Government
agencies
competitors

Trade unions
Elements of the internal business environment
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 Shareholders

The shareholders of a firm can directly

influence its policies and activities.

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 Customers

Customers have become more aware of

their right to be heard, to be informed and
to choose.

Firms need to maintain a good rapport

with their customers as their survival is
dependent on a fruitful exchange between
themselves and their customers.

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 Vendors / suppliers

The organisation is dependent on its vendors for

raw materials, equipment and services needed
for production. By buying at the right time, in the
correct quantities and at the right prices, the
organisation will be able to gain a competitive
edge over its competitors.

Thus, it is important for the business organisation

to pay its vendors on time, otherwise supplies will
not be forthcoming.
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 Competitors

To remain ahead of competition, the firm

must be able to offer customers goods and
services of the right price and quantity.

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 Trade Union

Trade unions use their collective

bargaining power to negotiate wages,
work conditions, work hours, overtime
payments, annual leave and other aspects
of the work environment.

They exist to safeguard the workers’

interests.

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 Government agencies

Business organisations have become

increasingly involved with the government at
various levels. It is now common to see
government as a customer of goods and
services.

E.g. Some of the public housing and

infrastructure in Malaysia have been built by
private firms working on government contracts.

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 Financial Institutions

Financial institutions are important components

in the economic structure of society. Business
organisations depend on banks and insurance to
finance their activities.

Management can maintain a healthy relationship

with these institutions by providing them with
timely information about the organisation’s
activities and achievements.

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Social responsibility of business
 Social / Public responsibility - is the
responsibility of firms to the community or
the public at large.

E.g. in their pricing, product quality,

employment levels and in the way they
treat the environment.

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Before an organisation can undertake
socially desirable objectives, it must first
generate enough profit to maintain the
confidence and support of its shareholders.

Funds allocated to social programs serve

an organisation’s interests by preventing
conflicts with environmentalists and
government agencies, and by improving
the organisation’s standing in the
community.
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 The Body Shop

The late Ms Anita Rodick has shown that

customers are prepared to pay for
cosmetics that are made of safe
ingredients and their support has kept the
Body Shop as an example of social
responsibility for business

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Barriers to Increased Social Responsibility

 It is only through an understanding of

barriers to social responsibility of business
that we can work towards overcoming
them.

Please read pg 20-21 of the text, Management by

Vincent Gabriel (2nd edition)

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TUTORIAL

Q1. What are the three barriers that prevent

firms from assuming more social
responsibility?

Q2. Name two ways in which the material

environment affects business
organisations.

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