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task environment on business

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Task Environment

Marketing dictionary.

External environment of an organization which affects its ability to reach business goals. Any business or consumer with direct involvement with an organization may be part of the task environment. Examples of task environment sectors include, competitors, customers, suppliers and labour supply.

Select a letter to find terms listed alphabetically.

At a basic level of understanding how internal organizations respond to environments, consider the theory of Open Systems, which the organizational theorists Katz and Kahn 35 and Bertalanffy introduced. 36

Exhibit 4.15 illustrates this theory’s view of organizations as open systems that take in resources and raw materials at the “input” phase from the environment in a number of forms, depending on the nature of the organization, industry, and its business. Whatever the input resource, (information, raw materials, students entering a university), those resources will be transformed by the internal processes of the organization. The internal organizational systems then process and transform the input material, which is called “through-put” phase, and move the changed material (resources) to the “outputs” and back into the environment as products, services, graduates, etc.

A diagram illustrates the open system model of an organization.

The open systems model serves as a feedback loop continually taking in resources from the environment, processing and transforming them into outputs that are returned to the environment. This model explains organizational survival that emphasizes long-term goals.

Organizations according to this theory are considered as either Open or Closed systems, (or relatively opened or closed) depending on the organization’s sensitivity to the environment. Closed systems are less sensitive to environmental resources and possibilities, and open systems are more responsive and adaptive to environmental changes. For example, during the 1980’s the then Big 3 U.S. auto manufacturers (Ford, General Motors and Chrysler) were pressured by Japanese auto manufacturers’ successful 4-cylinder car sales that hit the U.S. like a shock wave. The Detroit producers experienced slumping sales, plant closures, and employee lay-offs in response to the Japanese wave of competition. It seemed that the U.S. auto makers had become closed or at least insensitive to changing trends in cars during that time and were unwilling to change manufacturing processes. Similarly, Amazon’s business model, discussed earlier, has and continues to pressure retailers to innovate and change processes and practices to compete in this digital era.

Organizations respond to external environments not only through their structures, but also by the domains they choose and the internal dimensions and capabilities they select. An organization defines itself and its niche in an environment by the choice of its domain , i.e., what sector or field of the environment it will use its technology, products, and services to compete in and serve. Some of the major sectors of a task environment include marketing, technology, government, financial resources, and human resources.

Presently, several environmental domains that once were considered stable have become more complex and unstable—e.g., toys, public utilities, the U.S. Postal Service, and higher education. And even domains are changing. For example, as referred to earlier, the traditionally stable and somewhat unchanging domain of higher education has become more complex with the entry of for-profit educational institutions, MOOCs (massive open online courses), internal company “universities,” and other certification and degree programs outside traditional private institutions. Sharing-economy companies such as Uber and Airbnb have redefined the transportation domain in which taxis operate and the hospitality domain in which hotels and bed and breakfasts serve. New business models that use mobile phones, ICTs (information communication technologies), and apps remove middle management layers in traditional organizations and structures.

With a chosen domain in which to operate, owners and leaders must organize internal dimensions to compete in and serve their markets. For example, hierarchies of authority and chain of command are used by owners and top-level leaders to develop and implement strategic and enterprise decisions; managers are required to provide technologies, training, accounting, legal, and other infrastructure resources; and cultures still count to establish and maintain norms, relationships, legal and ethical practices, and the reputation of organizations.

A diagram shows the subsystems of the internal environment of an organization and the external forces affecting it.

Exhibit 4.16 shows internal organizational dimensions. These dimensions and systems include leadership, strategy, culture, management, goals, marketing, operations, and structure. Relationships, norms, and politics are also included in the informal organization. There are other internal functions not listed here, such as research and development, accounting and finance, production, and human resources. Another popular depiction of internal organizational dimensions is the McKinsey 7-S model , shown in Exhibit 4.17 . Similarly, strategy, structure, systems, skills, staff , and style all revolve around and are interconnected with shared values (or culture) in an organization.

A diagram shows a circular representation of the McKinsey 7 S model.

A unifying framework shown in Exhibit 4.18 , developed by Arie Lewin and Carroll Stephens, 37 illustrates the integration of internal organizational dimensions and how these work in practice to align with the external environment. Note that it is the CEO and other top-level leaders who scan the external environment to identify uncertainties and resources before using a SWOT analysis (identifying strengths, weaknesses, opportunities, and threats) to confirm and update the domain of an organization and then to define the vision, mission, goals, and strategies. Once the enterprise goals and strategies are developed, the organizational culture, structure, and other systems and policies can be established (human resources, technologies, accounting and finance, and so on).

A diagram illustrates the integration of the internal environment and the external environment of an organization.

As Exhibit 4.18 shows, after a CEO and the top-level team identify opportunities and threats in the environment, they then determine the domain and purpose of the organization from which strategies, organizational capabilities, resources, and management systems must be mobilized to support the enterprise’s purpose. 38 The company McDonald’s has, for example, successfully aligned its enterprise with the global environments it serves, which is “1% of the world’s population—more than 70 million customers—every day and in virtually every country across the world.” The major operating goal of the firm driving its internal alignment is a “fanatical attention to the design and management of scalable processes, routines, and a working culture by which simple, stand-alone, and standardized products are sold globally at a predictable, and therefore manageable, volume, quality, and cost.” 39 A more detailed SWOT analysis of McDonald’s operations can be found in endnote.

A photo shows a leaflet titled “Monitoring secondary shelf life” affixed on the kitchen wall of a McDonald’s store. It reports the secondary shelf-lives for six different ingredients.

In practice, no internal organizational alignment with its external environment is perfect or permanent. Quite the opposite. Companies and organizations change leadership and strategies and make structural and systems changes to meet changing competition, market forces, and customers and end users’ needs and demands. Even Amazon continues to develop, expand, and change. With a mission statement as bold and broad as Amazon’s, change is a constant: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online” (Amazon.com, Apr 15, 2018).

Amazon has a functional organizational structure that focuses on business functions for determining the interactions among the different parts of the company. Amazon’s corporate structure is best characterized as global function-based groups (most significant feature), a global hierarchy, and geographic divisions, as Exhibit 4.20 shows. This structure seems to fit with the size of Amazon’s business—43% of 2016 retail sales were in the United States. 40 Seven segments, including information technology, human resources and legal operations, and heads of segments, report to Amazon’s CEO. “Senior management team include two CEOs, three Senior Vice Presidents and one Worldwide Controller, who are responsible for various vital aspects of the business reporting directly to Amazon CEO Jeff Bezos.” 41 The strategic goal underlying this structure is to facilitate Amazon.com to successfully implement e-commerce operations management throughout the entire organization. 42

A flowchart shows the corporate structure of Amazon.

Despite the company’s exponential growth and success to date, as noted earlier in the section on organizational structures, a disadvantage of structures such as Amazon’s, and in this case Amazon’s, is that it has limited flexibility and responsiveness even with its current growth. “The dominance of the global function-based groups and global hierarchy characteristics reduces the capacity of Amazon to rapidly respond to new issues and problems encountered in the e-commerce business.” 43 Still, Amazon’s most outstanding success factor remains its CEO, Jeff Bezos—his ingenuity, vision and foresight, and ability to sustain and even extend the company’s competitive advantages. Amazon customers value these factors—customer purchase criteria (CPC) that include price, fast delivery, and reliable service. “Consumers choose Amazon because it does better than its competition on these CPC.” 44

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Task Environment - Meaning, Factors & Example

What is task environment.

Task Environment of an organization is the environment which directly affects the organization from attaining business goals. In brief, Task Environment is the set of conditions originating from suppliers, distributors, customers, stock markets and competitors which directly affects the organization from achieving its goals. 

Suppliers, distributors, customers, competitors all form part of the entire ecosystem in which an organization operates. Every business needs the other business to make sure that the best product is created for the customer meeting the needs and also earns profit. These interdependent conditions form the task environment.

Task Environment Factors

Task environment helps in identifying the environmental factors responsible for the success of the company or a product.

Factors with Examples for Task Environment

Competitors.

Competitors generally look for higher margins and for this they provide unique features to its products, thus try to create differentiation.

Example : Adidas, Nike, Puma all shoe manufacturers produce shoes catering for different segments in different styles and charge premium accordingly.

Organizations also compete for customers as well as for wholesalers, retailers etc. Customers decide the fate of any company and hence companies try their level best to lure them.

Example : Customers might start looking for some other alternative due to shift in consumer behavior like moving from conventional vehicles to electric vehicles. The shift might have been caused by the competitors.

Suppliers have high bargaining power if the raw materials being supplied are rare or if there are less number of suppliers in the market. So it’s important to hold on the suppliers and maintain good relationship with them. Acting intelligently, companies often maintain more number of suppliers to reduce risk of deserting by anyone.

Example : Kriti Nutrients Ltd. in India is supplier of lecithin to Nestle (for baby foods)

Distributors

Distributors who become intermediary between retailers and wholesalers or between manufacturer and wholesaler play a vital role in a task environment.

Example : In case of CPG products, distributors are the most important players in terms of increasing reach of a product across markets, customers and channels.

Hence, this concludes the definition of Task Environment along with its overview.

This article has been researched & authored by the Business Concepts Team . It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management Dictionary covers over 2000 business concepts from 5 categories.

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Factors of the Task Environment that Affect an Organization – Essay

Task environment consists of those industry factors which are external to the firm but have a direct and specific impact upon the organization and are in turn affected by the organization’s operations.

These factors are shown in the following diagram.

These factors are explained in more detail as follows.

1. Competition:

Competition is the basic element of a free enterprise system. The interests of both the organization and the customers are better served when choices in the market are available. Competition encourages progress and product-developments. It forces organizations to be more innovative and productive. For example, in 1955, Harley- Davidson held nearly 70% of the U.S. motorcycle market, but by 1983, this share had been reduced to only 3.7%.

This steep decline can be attributed to aggressive competition by Japanese companies such as Honda, Yamaha, Suzuki and Kawasaki who invaded the market with redesigned products and highly effective marketing strategies. Harley-Davidson failed to envision the strong impact of effective competition.

The American automobile market has always been dominated by three manufacturers, namely General Motors, Ford and Chrysler. General Motors was such a dominant company that it was often said that “what is good for General Motors is good for the United States.”

The competition from Japan changed the picture so much that Honda Accord, a Japanese car, has been the highest-selling car in America for many continuous years. Because of such tough competition from Japan in price and quality, American car manufacturers have improved the quality of their own products considerably.

It is important to recognize that the area of competition is not limited to customers only but it extends to competition for all scarce resources such as raw materials, capital and human resources. Thus management must congruously look for cheaper but quality substitutes for raw materials and must acquire and retain an effective and dedicated work force by offering good working environment and by providing motivation for self-actualization goals.

Competitive strategies are well guarded secrets. Research activities, new product developments and future advertising campaigns of competitors are extremely highly protected secrets. Accordingly, management of an organization must continuously monitor competitor activities and analyze each competitor to gain an understanding of its probable actions and responses.

2. Customers:

The basic reason for the very existence of any business organization is making profits and the profits are created by customers. Hence, knowledge about the customer’s needs and fulfilling these needs is an organization’s primary concern. Accordingly, an organization must continuously monitor the consumer environment in terms of any changes in customer’s needs or preferences.

Managers must also recognize certain buying preferences as passing fads and plan accordingly. An example of such fads may be the Nehru jacket or the designer jean. Customers can be the direct consumers who buy and use the products or services for themselves or they can be industrial organizations that use the products or services to produce their own products and services. An organization must match the changing needs of customers with new or improved products in today’s constantly changing business environment. According to Peters and Waterman, such successful companies as IBM, McDonalds and Walt Disney make every effort to stay close to their customers.

Many organizations now have well-defined organized systems in keeping up with their customers. They establish formal contacts asking them for feedback about the quality of their products and services and invite them to participate in helping make product design changes. According to Eric Von Hippel, in some industries, as much as 80 per cent of all important innovations have originated with users.

The customers expect a quality product at a reasonable price with guaranteed satisfaction. Accordingly, it is management’s responsibility to see that the interest of consumers is protected. “The customer is always right” has proved to be a good policy for intiating sales and keeping the customer.

3. Suppliers:

Since all organizations transform inputs of materials, equipment, energy, capital and labour into outputs of products and services, an organization must interact with a network of suppliers from whom these inputs are obtained.

This interaction is mutual and two- way. Just as an organization is interested that its suppliers maintain the quality of the materials that it buys from them, the suppliers are equally interested that the buyer organization brings out quality product.

Thus the buyers and sellers are interacting continuously to maintain such standards. Since quality and costs of raw materials determine whether the output product can meet the quality standards of a competitive market, many organizations look for suppliers from foreign sources which might provide advantages in price, quality or quantity.

Suppliers also influence a company’s strategic choices. Choosing the right supplier is an important strategic decision, whether it be colleges and universities which supply human resources or banks and federal lending agencies which provide capital or the suppliers of materials. Since a firm depends on its suppliers to provide certain resources at every stage of its operations, it is very important to keep good relations with the suppliers and it is always advisable to have choices among suppliers.

A firm that primarily depends upon one supplier for its resources can be crippled if the supplier goes out of business or is faced with its own labour or production problems. Accordingly, most organizations try to develop and maintain relationships with a variety of suppliers.

It is especially important to have close and dependable relationship with suppliers for those organizations who are using Just- in-Time (JIT) manufacturing approaches where resources become available when needed so that the need for keeping inventories can be eliminated.

4. Regulatory Agencies:

While political and legal issues and developments have an indirect impact on organizations and thus become an element of macro-environment, regulatory agencies are specific government agencies that have direct influence on organizational activities and operations and hence these are a part of the task environment of the organizations.

Regulatory agencies are created by local, state and federal government for the purpose of ensuring that organizations operate within the enacted laws. These agencies have the power to enforce laws in their respective fields and also introduce some of their own requirements that can be legally enforced. These agencies are basically set up to protect the public from certain business practices or to protect organizations from unfair competition.

These agencies regulate the activities of organizations in five principal areas. These are consumer protection, investor protection, environmental laws, preservation of free market competition and labour conditions. All these agencies are federally created and operate primarily within the United States of America.

The Consumer Products Safety Commission (CPSC) and Food and Drug Administration (FDA) protect the interests of consumers. Securities and Exchange Commission (SEC) establishes as to how public companies must conduct financial and accounting practices and protects investors from illegal securities activities.

Various antitrust laws are established to foster free competition and to discourage monopolization of markets. There are many laws that protect the interests of workers. These include equal employment opportunity, affirmative action and the right to work in relatively safe and healthy environment via Occupational Safety and Health Administration (OSHA) regulations.

Similarly, Environmental Protection Agency (EPA) protects the environment from being polluted by business organizations in terms of air pollution, water pollution and dumping of chemically hazardous wastes.

Similar to affirmative action laws in America where minorities, who have been discriminated against previously, are given preferential treatment in hiring and promotions, there are laws in India which provide special privileges to what is known as “Scheduled classes”, in terms of government jobs and admissions into medical colleges and other professional institutions.

A debate has begun both in India and in America whether it is fair to continue such “reverse discrimination” and whether the decisions to hire, select or promote people should be based upon merit only, provided that all citizens are given the same opportunity to prepare themselves for jobs, for admissions into colleges and for promotions and that there are no “reserved” seats for anybody or any group.

There is another type of “regulatory agency” which is known as the “interest group”. An interest group is organized by its members to attempt to influence organizations. Even though these interest groups lack the official power of government agencies, they can exert considerable influence on organizations by using the media to call attention to their positions. For example, an interest group in America, Mothers Against Drunk Drivers (MADD), has been successful in putting considerable pressure on alcoholic-beverage producers to put warning labels an their products and on bars and restaurants to refuse drinks to those who already had too much to drink.

5. Potential Entrants:

All organizations want to keep their number in the given industry limited. This reduces competition and increases profitability of these organizations. In some countries, the government laws and regulations are enacted to protect certain organizations from competition, domestic or foreign, either by denying new licenses or by erecting trade barriers. In India, for example, no new automobile maker could enter the market until recently. Similarly, the customs duty tax on imported items was kept so high that it protected the domestic producers of such items.

In a free market economy, such as America, that is not possible to do. Accordingly, organizations themselves try to defend their competitive position by maintaining some legitimate barriers to entry. These barriers include large economics of scale, product differentiation, large financial requirements, limited access to viable channels of distribution and cost advantages which the new entrants would find difficult to match.

It is almost impossible to enter into automobile manufacturing industry or aero plane manufacturing industry because of heavy set-up costs involved. Personal computers (PCs) industry is so highly saturated that it is not economically profitable to enter into the market unless someone comes up with a breakthrough.

Another entry barrier arises when potential entrants expect stiff retaliation from entrenched firms. For example, Xerox and General Electric found that they could not enter into the main frame computer industry because of domination by IBM on the basis of scale economies in production, research and development, marketing and service.

6. Substitutes:

Technological advances lead to the development of substitutes for existing products which offer either price or quality or convenience advantages. Laptop computers are a good substitute for desk top computers which themselves are good substitutes for mainframe computers under certain situations. Generic drugs are good substitutes for name brand drugs and cost much less. Pressure from substitute products limits an industry’s profit potential by competing and placing a ceiling on prices.

Firms that ignore the potential threats from substitutes find themselves losing their market share. For example, manufacturers of pin ball playing machines who ignored the boom in video arcade games suffered huge losses. Nutra Sweet, a sugar substitute minus calories posed a threat to sugar products as weight conscious dieters switched to Nutra Sweet as a good substitute for sugar.

Fiberglass insulation faces competition from such substitutes as Styrofoam, cellulose and so on. Accordingly, organizations must be continuously monitoring the environment for development of any substitutes that would pose a threat to their market share and must continue to improve the quality of their own products so as to be sufficiently cost effective to compete with such substitutes.

There is a very keen competition for qualified personnel and the organization needs the right mix of workers in order to survive and prosper. Accordingly, an organization must create and enhance an image of its environment which is conducive to attracting skilled and ambitious workers.

Furthermore, it is necessary for the organization to establish such training programs that help in developing future managers and leaders. Human resources are the most important resources for any organization because without the skilled people, the sophisticated technology, capital and materials are of little value.

In America, most of the labour force is organized into “Labour Unions”, who play a significant role in the organizations’ task environment. A typical, large manufacturing organization deals with many unions and must keep good terms with all the unions. A strike by any one of the unions can cripple the entire organization.

Eastern Airlines, one of the major air carriers went out of business because of labour disputes. A sympathetic labour union can be of great help in achieving organizational objectives even in times of economic difficulties. Labour unions wield considerable amount of power, as illustrated by the following example.

“In 1990, Mazda, one of the three unionized Japanese auto plants in the United States, began to experience labour difficulties, which embarrassed not only Mazda but also the United Auto Workers (UAW) union.

Mazda and the representative of the union worked out an agreement to work in harmony and to keep out potential trouble makers. However, when the union voted for its representatives, some activists and extremists got elected.

In response to union militancy, Mazda put into operation the following decision.

i. Replaced several important American managers with Japanese.

ii. Increased pressure on employees to produce more cars.

iii. Became more strict in handling sick leave and absenteeism.

These actions resulted in severe strain in relationships with the union which is in conflict with the Japanese style of management which dwells on team spirit and “family” type atmosphere”.

Accordingly, it is very important to keep the labour force happy with their jobs so that the workers do not pose a threat to the economic health of the organization.

Owners or the share holders (also known as stakeholders) are becoming an element of major concern for managers in many businesses. This is especially true of those share holders who hold large blocks of stock. For example Time Warner Inc. decided to issue new stock in 1991 to reduce its debt, but had to back down when several major stockholders opposed the move.

Another group exerting significant influence on organizations is the group that manages pension funds. These funds control nearly 50 per cent of the shares traded on the New York Stock Exchange.

Some organizations are beginning to be alert to the power that is in the hands of these pension funds managers, and there is fear that these managers may sacrifice long- term organizational effectiveness for the sake of short-term results.

Accordingly, management must continuously monitor the proposal of holders of large blocks of stock and must provide timely and correct information regarding the economic health of the organization to all stock holders.

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The Task Environment

The Task Environment is the entire work environment inside a business or company which includes the actors engaged in production, distribution, and promotion. The companies, suppliers, distributors, dealers, and target customers - anyone and everyone directly involved in the workings of the business is included in the task environment itself. 

In terms of the suppliers, material and service suppliers such as marketing research agencies, advertising agencies, banking and insurance companies, transportation companies, and telecommunications companies comprise the environment. 

Distributors and dealers include agents, brokers , manufacturer representatives, and others who facilitate finding and selling to customers and they too are a vital part of the environment. 

Parts of Task Environment

Task environments can be categorized into the two parts listed below - 

The quality of the task environment within any organization often depends on the cooperative mindset of the employees and the considerate ways of the employers that make the environment harmonious.

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Societal and Task Environment in Business Essay

The task environment involves external stakeholders that influence the firm’s ability to attain its business goals. Consumers, investors, suppliers, competitors, and other actors may be considered as the task environment. As Steigenberger, Lübcke, Fiala, and Riebschläger (2017) note, task environment plays an important role in shaping the decision-making process in a company. Therefore, it is crucial to analyze the effects that can be produced on this area of business by societal environment. The societal environment has a great impact on the organizations’ task environment. One of the aspects of societal environment’s impact that have received much attention from scholars lately is its connection to sustainability issues. Valentinov, Hielscher, and Pies (2015) emphasize the activity of societal environment in healthcare, social services, professional representation, environmental protection, culture, and other facets of organizations’ functioning Manos and Drori (2016) also note that the companies’ decisions regarding the reduction of carbon footprint or the enhancement of employment conditions are governed by societal environment. The results of such activities can cause alterations in the task environment. An example of the dependence of task environment on societal environment is when a company decides to reduce its carbon footprint. As a result of such a decision, suppliers may suffer since the firm may choose to stop the cooperation with those providers that are located far away and, as a result, emit much carbon dioxide while transporting the goods. Another example may be when the organization launches a health or an educational project. In this case, competitors will suffer since they will lose the competitive advantage. Therefore, it is possible to conclude that societal environment has a major effect on task environment. Many aspects of the corporation’s activity and its cooperation with stakeholders depend on societal environment.

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Manos, R., & Drori, I. (2016). Corporate social action and newspaper media: the role of geopolitical risk. In R. Manos & I. Drori (Eds.), Corporate responsibility: Social action, institutions and governanc e (pp. 117-139). New York, NY: Palgrave Macmillan. Steigenberger, N., Lübcke, T., Fiala, H. M., & Riebschläger, A. (2017). Decision modes in complex task environments. Boca Raton, FL: CRC Press. Valentinov, V., Hielscher, S., & Pies, I. (2015). Nonprofit organizations, institutional economics, and systems thinking. Economic Systems, 39 , 491-501.

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BusinessMan Talk

Main Components of Business Environment

Today, we are going to discuss the  main components of the business environment that one should know before starting a business.

Let’s start with some basics of the   components of the business environment.

Before jump into the components of business environment, Lets revised little bit of business environment.

Business environment is a mixture of complex, dynamic and uncontrollable external and internal factors within which a business is to be operated .

From the above definition, we can clearly classify the component of business environment .

Components of the business environment are classified into the following major categories.

Internal Environment

External environment.

Table of Contents

It is defined as all the controllable forces, factors and conditions within an organization that influence the organizational behavior in Organizations.

The internal environment is one of the important components of Business environment which directly influence the day to day activities of an organization. Such as Employee performance, the decision of the Board of directors and shareholders, the structure of the organization, etc.  Directly affect the growth of an organization.

An organization’s internal environment has the following sub-components:

They are the major components and important assets of organizations. They are responsible to work as per the organizational’ direction, goals, rules and regulation of the company. For their better performance, organizations have to motivate and satisfied them with fair and some unique and equitable rewards policies. Such as Bonuses, securities, flexible working hours, etc.  The organizations’ productivity and growth can be enhanced only by the dedication, loyalty, satisfaction, and cooperation of employees.

Shareholder and Board of Directors:

Shareholders are the actual owner of the Business organization. Shareholders being the owners of the business, have a direct interest in the performance of the organization. The board of directors is elected by them (shareholders) who represent shareholders’ interest in the board. The board is responsible to manage the company and formulate appropriate plans. They evaluate overall organizational performance and provide direction to the top-level management for the growth and development of an organization.

Organizational culture:

Culture is a set of values, beliefs, norms. Every organization has its own culture. Organizational Culture refers to set of values, beliefs, norms of an organization under which it operates. It helps to bind all the employees and comply with organizational rules and regulations. Culture has a powerful influence on the process of organizational change and decision making.

Labour Union:

Labour union represents the group of employees or labor working in an organization for saving the right of employees and labour. It takes problems and feeling of the labors to the management for constructive solutions. The good relation between labor unions and management avoids unnecessary disturbances in organizations.

Organizational Structure:

Structure is a framework of an organization. It clarifies the authority and responsibility roles and relations, hierarchy of management and coordination activities for the business . So Organizational structure is one of the major components of the internal environment.

Components of Business Environment

The external environment is the condition and forces outside the organization that is relevant to its operation and influence the organizational activities. There are two categories of the external environment. They are:

General Environment

General environmental factors have an indirect impact on the activities and outcomes of the firms.

Following are the components of the general environment:

Political Environment:

It refers to the influence of government institutions, strategies of political parties, policies of state and local government, and the relationship between government and business . Managers must know about the political environment because:

Economic Environment:

Economic conditions are critical to the success of the organizations. It is defined as the nature and direction of the economic system of a country and its impact on the individual organization.  Economic factors such as national income, saving, investment, monetary policies, economic growth, interest rate , consumption pattern, etc have a great impact on the functioning of an organization. Therefore, managers should devote much of their time and resources to forecasting the economy and possible changes.

Socio-Cultural Environment:

The socio-cultural environment affects the behavior of people and their organizations. It includes values, beliefs, lifestyle, family systems, opinions, and assumptions widely held by the citizen of a particular country. These elements of society impact business organizations.

Technological Environment:

Technology is the practical application of scientific knowledge. Radical development has occurred over the past several years in communication, information, and automation including robotics. This development brings both opportunities and threats to organizations. Thus, organizations should utilize their strength to gain from opportunities and neutralize the threats.

Task Environment

The task environment has a direct impact on the operation of the firms.

The following are the components of the task environment

Customers exchange resources, usually in the form of money for an organization’s product and services. A customer may be an individual, family, a business house or an institution. Customer not only buys the product or services they also give valuable ideas, opinions, and reaction related to it. Thus, the manager should maintain a close relationship with them.

 Suppliers are the organizations that provide resources like materials, gin, men, machines, etc to other firms. As the quality and price of the raw material received from the suppliers determine the quality of the output, the business firm tries to obtain lower prices, better quality, and fast deliveries. This strengthens the competitive position of organizations.

Government:

The role of the government is to regulate the business system and to protect the interest of customers and the general public. It formulates rules and regulation, business policies, etc under which every firm need to operate. Therefore, the government has a great influence on the corporate policies, procedures, and business practices of modern organizations.

Competitors:

It refers to organizations that compete for resources with other organizations and provides similar or substitute products and services to the same group of people. The organization must analyze the competition and establish clearly defined marketing strategies in order to provide superior customer satisfaction and to increase market share.

The media keeps an eye on the vital decision or actions of the business firms having general public interest. Therefore managers need to have good communication with both media and external audiences and deal with them effectively and promptly.

Financial institutions:

Organizations depend on a variety of financial institutions such as banks, insurance companies, capital markets, etc to supply funds for maintaining and expanding their business activities. The terms and conditions of loans and advances and the quality of promptness of their services have an impact on the performance of business firms.

Special Interest Group:

It refers to environmentalists, unions, consumer advocates, civic society, and other professional organizations. These organizations pressurized the company to advance their position on issues like quality services, reasonable price, waste management, environmental protection, etc.

FAQ Related to Components of Business Enviroment

How many components are there in a business environment?

There is only two main components in a business environment. They are : 1. Internal Environment 2. External Environment But Under Internal Environment, there are 4 sub-components. they are Employees, Shareholder, and Board of Directors , Organizational culture , Labor Union , Organizational Structure .

External Environment has two categories general and task environment.

The general environment has 4 sub-components. They are political, economic, socio-cultural, and technological environments .

Task/ Operation Environment has 7 sub-components of the business environment. They are customers, suppliers, government, competitors, financial institutions, media, and social interest groups.

Wrapping Up

As I said Business environment components are like a warrior which can break or make your business.

I hope you got some amazing knowledge of business environment components that almost no one knows,

If you find this article helpful, Let me know in the comment section, and also If you have more amazing facts related to the business environment and its components,

So you can comment on that and I’ll try to add that interesting fact soon.

Suman (Kul Prasad) Pandit

Suman(Kul Prasad) Pandit is an accomplished business professional and entrepreneur with a proven track record in corporate and start-up sectors in the UK and USA. With a focus on sustainable business practices and business education, Suman is highly regarded for his innovative problem-solving and commitment to excellence. His expertise and dedication make him a valuable asset for businesses seeking growth and success.

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Business Environment: Meaning, Definition, Components, Dimension, Importance, and Impacts

task environment on business

Meaning of Business Environment

The term “Business environment” represents the sum of all the individuals, institutions, competing organisations, government, courts, media, investors, and other factors outside the power of the business organisations but affects the business performance. Hence, changes in government economic policies, rapid changes in technology, changes in consumer tastes and preferences, increasing market competition, etc. are outside the business organisations' power but affect the business performance immensely.

For example, an increase in taxes by the government makes everything expensive in the market; technology changes may make the existing product obsolete, political uncertainty creates fear in the mind of investors, increase in competition in the market due to competitors may affect business profit, and changing in demand and preferences may increase the need for a new product and decrease the demand for old product.

Business Environment Definition

The term “Business environment " is the sum of all conditions, events, and influences that surround and affect business activities and growth.

Components of Business Environment

Internal - It combines the factors that exist within the company. These are –

Human resources

Value system

Vision and mission

Labour union

Corporate culture

External - An external Environment includes those outside factors that exercise an influence on a business’s operations. It is further classified into two segments.

Macro - Socio-cultural, political, legal, and global factors fall into this category.

Micro - This environment has a direct and immediate impact on a business. It consists of customers, investors, suppliers, etc. 

Features of Business Environment

The business environment is the sum of all external factors that affect its growth.

The business environment includes both general and specific forces. Specific forces include investors, customers, competitors, and suppliers. These factors affect individual enterprises directly and immediately in their day-to-day working. General forces include social, political, legal, and technological conditions. The general forces affect the business environment individually.

The business environment is dynamic.

The business environment is highly uncertain.

The business environment is a relative concept as it differs from country to country and even region to region.

Dimensions of Business Environment

The dimension of the business environment refers to the sum of all factors, enterprises, and forces that constitute direct or indirect influence over business activities. Such five key elements are listed below. 

Social Environment 

It implies the tradition, culture, customs, and values of a society in which the business exists. 

Tradition: In India, festivals like Diwali, Christmas, and Holi provide a financial opportunity for several market segments like sweet manufacturers, gifting products suppliers, etc. 

Value: A company that follows long-held values like social justice, freedom, equal opportunities, gender equality, etc. excels in that given society.

Recurrent Trends: It refers to development or general changes in a society like consumption habits, fitness awareness, literacy rate, etc. which influence a business. For example, the demand for organic vegetables and gluten-free food is increasing; therefore, companies that manufacture food items keep this in mind to attract more crowds. 

2. Legal Environment 

It includes the laws, rules, regulations, and acts passed by the government. A company has to operate by abiding by the rules and regulations of laws like the Consumer Protection Act 1986, Companies Act 1956, etc. A proper understanding of these laws assists in the smooth operations of a company. 

Example: A cigarette-selling company compulsorily has to put the slogan “smoking is injurious to health” on every packaging.   

Economic Environment 

It involves market conditions, consumer needs, interest rate, inflation rate, economic policies, etc. 

Interest Rate - For example, interest rates of fixed-income instruments prevalent in an economic environment impact the interest rate it will offer on its debentures.

Inflation Rate - A rise in the inflation rate leads to a price hike; hence, it limits businesses. 

Customer’s Income - If the income of customers increases, the demand for goods and services will rise too. 

Economic Policies - Policies like corporate tax rate, export duty, and import duty influence a business.

Political Environment 

It consists of forces like the government's attitudes towards businesses, ease-of-doing-business policies, the stability of the governing body, and peace within the country. All of these factors are extremely crucial for a company to sustain itself.  If the central and local government sanctions, policies, or acts are in favour of businesses, the nation's overall economy strengthens due to increasing employment, productivity, and import and export of various products. 

Example - A pro-business government will make foreign investments more attractive in that country.   

Technological Environment

It comprises the knowledge of the latest technological advancements and scientific innovations to improve the quality and relevance of goods and services. 

A company that regularly keeps track of these news can mould its business strategies accordingly.

Example: A Watch Company that sells smartwatches and traditional watches will prosper as smartwatches are trendy recently. 

Practice Questions on Business Environment Dimensions with Answers

____________ consists of economic conditions, economic policies, industrial policies, and economic systems.

Business Environment

Economic Environment

Natural Environment

None of the above

Ans. b) 

The External Environment of business is 

Demographic

All of these

Importance of Business Environment

The business environment and its  importance are necessary for the following reasons:

Enabling the identification of opportunities and taking immediate steps to explore the benefits. 

Helping identify threats and early warning signals

To cope with the immediate changes.

Support in planning and policy.

Improving the business performance. 

Impact of Government Policies on Business and  Industry

The different policies of the government, including liberalisation, privatisation, and globalisation, immensely impacts the working of enterprises in business and industry in terms of:  

Increasing competition

More demanding customers

Rapidly changing technological environment

Necessity for change

Need for developing human resource 

Market orientation

Loss of budgetary support to the public sector.

task environment on business

FAQs on Business Environment: Meaning, Definition, Components, Dimension, Importance, and Impacts

1. Why is the business environment important?

The business environment provides several opportunities, and it is essential to identify them to improve a business's growth and performance. Early identification of opportunity helps an enterprise be the first to explore benefits instead of losing them to competitors.

2. What does Micro Environment mean?

Micro Environment relates to the immediate factors that influence the direct and daily operations of a business. It is also called the task Environment. It includes suppliers, customers, etc.

3. Who are the major players in the Business Environment?

The major players in the business environment include competitors, suppliers, investors, customers, media, government, economic conditions, and several other external working factors. 

4. What are the five main elements of the business environment?

The five main elements of the business environment include the following:

Business Environment – Definition, Components, & Features

Business environment

Several internal and external factors directly or indirectly influence business operations. While some of these are within the business’s control, most of these are not; and the business has to adapt itself to avoid being affected by changes in such factors. Both of them combined forms the business environment.

Today’s fast-paced business world witnesses a trend of a rather dynamic business environment – that is, it’s never stable. Hence, keeping track of these changing trends, demands, strategies, and policies is crucial in the business world. 

But first, what is a business environment and what are the factors that influence it?

What Is Business Environment?

A business environment is a combination of internal and external factors and forces that significantly influence the operations of a business.

The business environment comprises an internal and external environment that directly or indirectly affects business operations.

Components Of Business Environment

The business environment can be categorised into two types based on the factors within the control or outside the control of a business.

Internal Environment

The internal business environment constitutes several internal forces or elements within the control of a business that influences its operations. These include:

External Environment

External components are those factors that a business cannot control. These exist beyond a business’ jurisdiction and supervision limit. External components influencing a business environment are further classified into two categories:

Micro Environment

Micro environment is the business’s immediate external environment that influences its performance as it has a direct bearing on the firm’s regular business operations.

It includes factors outside of the business’s control but can be analysed and worked upon by managing the business to prevent any business losses. 

Micro factors include:

Macro Environment: PESTLE

The macro environment includes remote environmental factors that influence an organisation. The extent of influence a macro element can have on a business is significant as they usually affect the industry as a whole. 

These factors are classified under PESTLE: P – Political, E – Environmental, S – Social, T – Technological, L – Legal, E – Economical.

Pestle Analysis Business Environment

Importance of Business Environment

The market is essentially flooded with competing businesses. It is, thus, integral for a business to keep a lookout for the forces that affect it. 

Emphasis is laid on maintaining continuous interaction with a company’s business environment. Understanding this environment allows companies to –

Features Of Business Environment

A business environment is:

Go On, Tell Us What You Think!

Did we miss something?  Come on! Tell us what you think of our article on the  business environment  in the comments section.

Siddhi Kamble

A startup enthusiast who enjoys reading about successful entrepreneurs and writing about topics that involve the study of different markets.

what a amazing article !…

Such a great article. This helps me a lot. It’s very informative. And once again thank you so much. Getuplearn

This is an amazing article woow It highlights almost everything concerning the business environment. It’s a good research material only that it misses the impacts of the business environment on the business

Business Environment – Definition, Components, & Features

task environment on business

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Internal and External Environment Factors that Influences Organizational Decision Making

Organizational environment denotes internal and external environmental factors influencing organizational activities and decision-making.

Every organization, whether business or non-business, has its environment. The organizational environment is always dynamic and ever-changing.

Changes today are so frequent, and every change brings so many challenges that managers and leaders of the organization need to be vigilant about environmental changes. The environment of an organization consists of its surroundings – anything that affects its operations favorably or unfavorably.

Environment embraces such abstract things as an organization’s image and such remote visible issues as the country’s economic conditions and political situations.

The environmental forces, abstract and visible, need careful analysis. The systematic and adequate analysis produces the information necessary for deciding what strategy to pursue.

Managers cannot make appropriate and sound strategies simply based on their guesses and instincts. They must use relevant information that directly flows from their organization’s environment analysis.

Types of Organizational Environment

Internal environment of organization, external environment of organization – factors outside of the organization’s scope, general environment of organization – common factors that all companies in the economy face, 8 elements of the general external environment, industry/task environment of organization – industry factors that are vital for business functions, 6 elements of the industry or task environment, influence of internal and environment on business.

By the word “environment,” we understand the surroundings or conditions in which a particular activity is carried on.

And we know that an organization is a social entity that has a hierarchical structure where all necessary items are put together. They act within it to reach the collective goal.

Organizations or, more specifically, business organizations and their activities are always being affected by the environment. In an organization, the management body’s actions are influenced by the environment.

Types of Organizational Environment

Organizations have an external and internal environment;

An organization’s operations are affected by both types of environments.

Therefore, managers need to make an in-depth analysis of the elements of the environment so that they can develop an understanding of the internal and external situations of the organization.

Based on their understanding, they will be better able to establish the required objectives for their organization and formulate appropriate strategies to achieve those objectives.

In this post, we will look at the elements of the organization’s environment.

Forces, conditions, or surroundings within the organization’s boundary are elements of the organization’s internal environment.

The internal environment generally consists of elements within or inside the organization, such as physical resources, financial resources, human resources , information resources, technological resources, the organization’s goodwill, corporate culture, and the like.

The internal environment includes everything within the boundaries of the organization.

Some of these are tangible, such as the physical facilities, the plant capacity technology, proprietary technology, or know-how; some are intangible, such as information processing and communication capabilities, reward and task structure, performance expectations, power structure management capability, and dynamics of the organization’s culture.

Based on those resources, the organization can create and deliver value to the customer. This value is fundamental to defining the organization’s purpose and the premise on which it seeks to be profitable.

Are we adding value through research and development or customer service, or by prompt delivery, or by cutting any intermediary which reduces the customers’ costs?

Organizations build capabilities over a long time. They consistently invest in some areas so that they can build strong competitive businesses based on the uniqueness they have created.

The manager’s response to the external environment would depend upon the availability and the configuration of resource deployment within the organization.

The deployment of resources is a key managerial responsibility.

Top management is vested with the responsibility of allocating resources between the ongoing operations/activities and future operations of strategic nature. That is they might yield returns in some future time that require resources now to be nurtured and have some associated risks.

The top management has to balance the conflicting demands of both, as resources are always finite.

For example, General Electric is an aggressive innovator and marketer who has been ruthless in its approach to changing proactively as well as reactively to sustain its competitive positions in the respective industries.

This implies that over the years, General Electric has invested in developing those capabilities, systems, and processes that enable it to respond.

Owners and Shareholders

Board of directors, organizational culture, resources of the organization, organization’s image/goodwill.

The internal environment consists mainly of the organization’s owners, the board of directors, employees, and culture.

Owners are people who invest in the company and have property rights and claims on the organization. Owners can be individuals or groups of persons who started the company; or bought a share of the company in the share market.

They have the right to change the company’s policy at any time.

Owners of an organization may be an individual in the case of a sole proprietorship business, partners in a partnership firm, shareholders or stockholders in a limited company, or members in a cooperative society. In public enterprises, the government of the country is the owner.

Whoever the owners are, they are an integral part of the organization’s internal environment. Owners play an important role in influencing the affairs of the business. This is the reason why managers should take more care of the owners of their organizations .

The board of directors is the company’s governing body elected by stockholders. They oversee a firm’s top managers, such as the general manager.

Employees or the workforce, are the most important element of an organization’s internal environment, which performs the administration tasks. Individual employees and also the labor unions they join are important parts of the internal environment.

If managed properly they can positively change the organization’s policy. But ill-management of the workforce could lead to a catastrophic situation for the company.

Organizational culture is the collective behavior of members of an organization and the values, visions, beliefs, and habits that they attach to their actions.

An organization’s culture plays a major role in shaping its success because culture is an important determinant of how well the organization will perform.

As the foundation of the organization’s internal environment, it plays a major role in shaping managerial behavior.

An organization’s culture is viewed as the foundation of its internal environment. Organizational culture (or corporate culture) significantly influences employee behavior.

Culture is important to every employee, including managers who work in the organization.

A strong culture helps a firm achieve its goals better than a firm having a weak culture. Culture in an organization develops and ‘blossoms’ over many years, starting from the practices of the founder(s).

Since culture is an important internal environmental concern for an organization, managers need to understand its influence on organizational activities.

An organization s resources can be discussed under five broad heads: physical resources, human resources, financial resources, informational resources, and technological resources.

Physical resources include land and buildings, warehouses, and all kinds of materials, equipment, and machinery. Examples are office buildings, computers, furniture, fans, and air conditioners.

Human resources include all employees of the organization from the top level to the lowest level of the organization . Examples are teachers in a university, marketing executives in a manufacturing company, and manual workers in a factory.

Financial resources include capital used for financing the organization’s operations, including working capital.

Examples are investments by owners, profits, reserve funds, and revenues received out of a sale. Informational resources encompass ‘usable data needed to make effective decisions.

Examples are sales forecasts, supplier price lists, market-related data, employee profiles, and production reports.

The reputation of an organization is a very valuable intangible asset. High reputation or goodwill develops a favorable image of the organization in the minds of the public (so to say, in the minds of the customers).

‘No- reputation’ cannot create any positive image. A negative image destroys the organization’s efforts to attract customers in a competitive world.

The internal environment of an organization consists of the conditions and forces that exist within the organization.

Internal environment {sometimes called micro-environment) portrays an organization’s ‘in-house’ situations.

An organization has full control over these situations. Unlike the external environment, firms can directly control the internal environment.

The internal environment includes various internal factors of the organization, such as resources, owners/shareholders, a board of directors, employees and trade unions, goodwill, and corporate culture. These factors are detailed out below.

Factors outside or organization are the elements of the external environment. The organization has no control over how the external environment elements will shape up.

The external environment embraces all general environmental factors and an organization’s specific industry-related factors. The general environmental factors include those that are common in nature and affect all organizations.

Because of their general nature, an individual organization alone may not be able to substantially control its influence on its business operations.

Managers have to continuously read signals from the external environment to spot emerging opportunities and threats. The external environment presents opportunities for growth leadership and market dominance and poses the threat of obsolescence for products, technology, and markets.

While one section of an organization faces opportunities, another faces threats from a similar environment, perhaps because of differentiation in their respective resources, capabilities, and entrenched positions within the industry.

For example, the burgeoning mobile telephone market in India provides enormous opportunities for different types of organizations, from handset manufacturers, content developers, application developers, and mobile signal tower manufacturers to service providers.

At the same time, it poses a threat to the fixed-line telephone business, which has long been the monopoly of public sector enterprises.

The increasing demand for telecommunication services in India post-deregulation was an enormous opportunity for early entrants to enter the telecom services business and compete for revenue with state-owned organizations.

At the same time, the growing demand for mobile services led to an expansion of industrial capacity, price wars, lowering of call tariffs, acquisitions, and declining industry profits.

India has one of the lowest call rates in the world. As the industry matured and consolidation took place, the old players had to alter their business models and strategies.

The external environment can be subdivided into 2 layers;

Internal and External Environment Factors that Influences Organizational Decision Making

The general environment usually includes political, economic, sociocultural, technological, legal, environmental (natural), and demographic factors in a particular country or region. The general environment consists of factors that may affect operations but influence the firm’s activities.

The factors of the general environment are broad and non-specific, whereas the dimensions of the task environment are composed of the specific organization.

The external environment consists of an organization’s external factors indirectly affecting its businesses. The organization has little or no control over these factors, so the external environment is generally non-controllable.

However, there may be exceptions. The external environmental factors reside outside the organization, which can lead to opportunities or threats.

For the convenience of analysis, we can divide the external environment into two groups: (a) general environment (or remote environment), and (b) industry environment (some call it the ‘immediate operating environment,’ ‘task environment, or specific environment’).

The general environment consists of factors in the external environment that indirectly affect firms’ business operations.

The major factors that constitute the general environment include political situations, economic conditions, social and cultural factors, technological advancements, legal/regulatory factors, natural environment, and demographics in a particular country or region.

The industry environment consists of those factors in the external environment that exist in the industry in which the organizations operate their business. The industry environmental factors are generally more controllable by a firm than the general environmental factors.

Industry environment comprises those factors in the external environment that exists in tie concerned industry of a firm in which it is operating its business.

For example, US Pharma is operating its business in the pharmaceutical industry.

Therefore, all factors that are likely to affect the business operations of Incepta Pharmaceuticals Limited would be included in the ‘industry environment’ of the company.

There are 6 factors in the industry environment: suppliers, buyers & customers, competitors & new entrants, substitute products, regulators, and strategic partners.

It may be noted that some industry environmental factors, such as competitors and substitute products, may exist even outside the concerned industry.

For example, a leasing company may emerge as a competitor of the companies in the banking industry in terms of attracting deposits and providing loans to business houses.

Regarding the industry environment, the important issue to appreciate is that they reside in the immediate competitive situations of a firm.

Also, they are very specific in that they can be easily identified. For these reasons, they are often regarded as ‘specific environment’ or ‘task environment.’

The strategy-makers must understand the challenges and complexities of the general and industry environmental factors. They must appreciate that the general environmental factors are largely non-controllable because of their distantly located external nature.

When strategists take cognizance of both the general (remote) and industry (operating) environments, they are likely to become more proactive in strategic planning.

In the following discussions, you will find a broad description of the general environment.

The general environment includes the; distant factors in the external environment that is general or common in nature. Its impact on the firm’s operations, competitors, and customers make its analysis imperative.

We can use the PESTLE model to identify and analyze the factors in the general environment. PESTLE Model covers political, economic, sociocultural, technological, legal, and environmental (natural). Along with these, we can add additional factors that suit the current modern business atmosphere, demographic factors, and international factors.

Political Legal Factors

Economic factors, socio-cultural factors, technological factors, legal factors, environmental / natural factors, demographic factors, international factors.

The political factors of the general environment refer to the business-government relationship and the overall political situation of a country.

A good business-government relationship is essential to the economy and, most importantly, for the business.

The government of a country intervenes in the national economy by setting policies/rules for business. We see many such policies – import policy, export policy, taxation policy, investment policy, drug policy, competition policy, consumer protection policy, etc.

Sometimes, the government pursues a nationalization policy for state ownership of a business.

Some countries, such as India, pursue state-driven mercantilism to reduce imports and increase exports. Some countries; have liberalized their economy and shifted from centrally managed economies to capitalist economies or welfare economies.

In many 3rd world countries, successive governments emphasize privatization more than state ownership. As global competition has increased, the government has also liberalized its trade policies to align with the WTO agreements.

Another important issue is political stability, which substantially affects business firms’ operations. Divert’s decision about investment is highly affected by political stability.

Managers must be able to understand the implications of the activities of these agencies and groups.

Government agencies include different ministries, the office of the Controller of Imports and Exports, the Board of Investment, the Revenue board or agency, Chambers of Commerce and Industry, Employers’ Associations, the Environmental Protection Movement, and the like.

Since the pressure groups put restraints on business managers, managers should have clear ideas about the actions of these groups.

The economic factor of an organization is the overall status of the economic system in which the organization operates. The important economic factors for business are inflation, interest rates, and unemployment.

These factors of the economy always affect the demand for products. During inflation, the company pays more for its resources, and to cover its higher costs, they raise commodity prices.

When interest rates are high, customers are less willing to borrow money, and the company itself must pay more when it borrows. When unemployment is high, the company can be very selective about who it hires, but customers’ buying power is low as fewer people are working.

A country’s economic conditions affect market attractiveness. The performance of business organizations is affected by the health of a nation’s economy.

Several economic variables are relevant in determining business opportunities.

Examples of economic factors include the trend in economic growth, population income levels, inflation rate, tax rates for individuals and business organizations, etc.

There is thus a need to analyze the economic environment prudently by the business firms.

The economic environment comprises a distinct variable with which management must be concerned. A country’s economy can be in a situation of boom or recession or depression or recovery, or it may be in a state of fluctuation.

Managers/strategy-makers must be able to predict the economy’s state. These warrants the necessity of studying the economic environment to identify changes, trends, and their strategic implications.

Business organizations operate their businesses in markets consisting of people. These people are likely to become customers when they have purchasing power. And purchasing power depends on income, prices, savings, debt, and availability of credit.

Therefore, business organizations must pay attention to customers’ income and consumption patterns.

However, all the economic variables in the economy must be treated holistically for the clear envisioning of the entire economy and the market.

Customs, mores, values, and demographic characteristics of the society in which the organization operates make up the general environment’s socio-cultural factors.

A manager must well study the socio-cultural dimension. It indicates the product, services, and standards of conduct that society will likely value and appreciate.

The standard of business conduct varies from culture to culture, as does the taste and necessity of products and services. Socio-cultural forces include culture, lifestyle changes, social mobility, attitudes toward technology, and people’s values, opinion, beliefs, etc.

A society’s values and altitudes form the cornerstone of society. They often drive other conditions and changes. The hand for many products changes with the changes in social attitudes.

Socio-cultural factors differ across countries. In many countries, worker diversity is now a common phenomenon.

We find in first world countries the increasing life span of population, trend towards fewer children, movement of population from rural areas to urban areas, increasing rate of female education, more and more women entering the mainstream workforce, etc.

All these have a primary effect on a country’s social character and health.

Therefore, managers of business organizations need to study and predict the impact of social and cultural changes on the future of business operations in terms of meeting consumer needs and interests.

Business firms must offer products in society that correspond to their values and attitudes. It denotes the methods available for converting resources into products or services.

Managers must be careful about technological factors. Investment decisions must be accurate in new technologies, and they must be adaptable to them.

Technological factors include information technology, the Internet, biotechnology, global transfer of technology, and so forth. None can deny the fact that the pace of change in these technological dimensions is extremely fast.

Technological changes substantially affect a firm’s operations in many ways. The advancement of industrialization in any Country depends mostly on the technological environment. Technology has major impacts on product development, manufacturing efficiencies, and potential competition.

Business organizations facing changing technology problems are always more difficult than those with stable technologies.

The effects of technological changes occur primarily through new products, processes, and materials. An entire industry may be transformed or revitalized due to new technology.

Strategy formulation is linked to technological changes. An intelligent response to the ever-increasing technological advances should be entrepreneurial rather than reactive.

Strategic managers need to monitor developments in technology for their particular industry when formulating a strategy. A quick and thorough study of technological changes; helps managers achieve a higher market share because of the early adoption of new technology.

A firm must be aware of technological changes to avoid obsolescence arid promote innovation. It means that strategy managers of an organization must be adept in – technological forecasting.

The legal environment consists of laws and regulatory frameworks in a country. Many laws regulate the business operations of enterprises, such as the Factories Act, Industrial Relations Ordinance, the Contract Act, and the Company law, just to name a few.

Business laws protect companies from unfair competition and consumers from unfair business practices.

Business laws also protect society at large. The laws regarding a merger, acquisitions, industry regulation, employment conditions, unionization, workmen’s compensation, and the like affect a firm’s strategy.

Even globalization has caused significant repercussions in the legal environment. Thus, business managers must thoroughly know the major laws that protect business enterprises, consumers, and society.

And the overall situation of law implementation and justice in a country indicates that there is a favorable situation in business in a country.

Strategy-makers need to analyze the trends in the natural environment of the country where it is operating their business.

The most pertinent issues in the natural environment that strategy-makers should consider include the availability of raw materials and other inputs, changes in the cost of energy, levels of environmental pollution, and the changing role of government ‘in environmental protection.

Changes in the physical/natural environment, such as global warming, will heavily affect our daily lives and the functioning of our organizations with various consequences.

The demographic environment is concerned with a country’s population.

Specifically, it is related to the population’s size, age structure, geographic distribution, ethnic mix, and income distribution.

With over 8 billion population, demographic changes are evident worldwide. There is negative population growth in some countries, and in some countries, couples are averaging fewer than two children. In general, the average age is increasing.

In many countries, rural-urban migration is rampant. These trends suggest numerous opportunities for firms to develop products and services to meet the needs of diversified groups of people in society.

Strategy-makers must analyze the demographic issues, especially the size and growth rate of the population, age distribution, ethnic mix, educational level, household patterns, and inter-regional movements.

Virtually every organization is affected by international factors. It refers to the degree to which an organization is involved in or affected by businesses in other countries.

The global society concept has brought all the nations together, and modern network of communication and transportation technology, almost every part of the world is connected.

General external environmental factors are interrelated with organizational success.

Therefore, strategy-makers need to analyze them in an interrelated fashion to understand and visualize the ‘whole of the environment.

A business firm’s strategy is affected by the structural characteristics of the industry, it is thus considered essential for a firm to make an elaborate analysis of the industry in which the firm operates its business.

Based on Michael Porter’s research results, the Van industry structure consists of suppliers, buyers, direct competitors, new entrants, and substitutes. The strategy-makers of a firm need to be concerned with the impact of the industry structure on the firm’s strategy.

Once the external environmental analysis has been completed, they should embark upon industry analysis. Industry analysis helps them have clear information about what is happening in the industry in which their companies are operating their businesses.

Since the industry contains competition, its analysis brings to light the complexities of the competition and the consequent challenges facing the industry.

The industry environmental factors, on the other hand, are those factors in the external environment that specifically reside in a particular industry and affect competition, such as suppliers, customers, competitors, and substitute products.

The task environment consists of factors that directly affect and is affected by the organization’s operations. These factors include suppliers, customers, competitors, regulators, and so on.

A manager can identify environmental factors of specific interest rather than having to deal with a more abstract dimension of the general environment.

As a manager or entrepreneur, you should be able to identify the various elements of the industry environment so that you can take appropriate steps to respond to them effectively in order to survive in the industry.

Elements of Industry Environment

Customers & Buyers

Competitors & new entrants., substitute products, strategic partners.

Suppliers are the providers of production or service materials. Dealing with suppliers is an important task of management.

A good relationship between the organization and the suppliers is important for an organization to keep a steady following of quality input materials. Suppliers are sources of resources such as raw materials, components, equipment, financial support, services, and Office Supplies.

To ensure a company’s long-term survival and growth, it is essential to develop a dependable relationship between a business firm and its suppliers. Concerning its competitive position with suppliers, a company should address the following questions;

“Satisfaction of customer”- the primary goal of every organization. The customer pays money for the organization’s product or services. They are the peoples who hand them the profit that the companies are targeting.

Managers should pay close attention to the customers’ dimension of the task environment because its customers purchase what keeps a company alive and sound. Strategy managers must understand the composition of the company’s customers .

With this end in view, they need to develop an exhaustive customer profile of the present and potential customers. Managers will be in a better position to pragmatically plan the firm’s strategic operations, anticipate changes in the size of the markets, and anticipate demand patterns.

While constructing a customer profile, managers need to use information regarding customers’ geographic location, demographic characteristics, psychographic issues, and buyer behavior.

The competitors often influence the policies of the organization. Competitive marketplace companies are always trying to stay and go further ahead of their competitors.

In the current world economy, competition and competitors in all respects have increased tremendously. A firm needs to analyze the competitive intensity in the industry. It needs to understand its competitive position in the industry to improve its chance of designing winning strategies.

Many companies develop a ‘competitor profile’ to accurately forecast their short-and-long-term growth and profit potentials.

A competitor profile may include such variables as market share, product line, the effectiveness of sales distribution, price competitiveness, advertising and promotion effectiveness, location, and age of the facility, production capacity, raw material costs, financial position, etc.

This positive effect is that the customers always have options, and the quality of products goes high.

The new entrants are the upcoming competitors of the firm. They are potential competitors because the competitive intensity increases when they enter the industry with similar products.

Regulators are units in the task environment that have the authority to control, regulate or influence an organization’s policies and practices.

Government agencies are the main player in the environment, and interest groups are created by their members to attempt to influence organizations as well as the government. Trade unions and the chamber of commerce are common examples of interest groups.

The producers of substitute products are indirect competitors.

Substitute products serve the same categories of customers. They can meet the similar needs of customers and, therefore, emerge as threats.

For example, when the detergent powder is capable of meeting customer needs in a much better way, or even in the same way as the laundry soap does, the detergent powder becomes a strong indirect competitor of laundry soap.

They are the organization and individuals with whom the organization is to an agreement or understanding for the benefit of the organization. These strategic partners, in some way, influence the organization’s activities in various ways.

The industry environment is the competitive environment of a business organization. The industry environment substantially affects a firm’s business operations because it is the ‘immediate’ external environment of the firm, also known as the ‘immediate operating environment.’

Every firm operates its business in an industry. Therefore its activities are directly affected by any change in the industry, and therefore its activities are directly affected by any changes in the industry environment.

Changes in the general environment can directly impact any of the factors in the industry environment.

An organization has greater control over the industry’s environmental factors than the general environmental factors.

One point is to be noted that although the industry environment affects all the firms in the industry, in reality, all firms are not affected equally.

Business managers must understand the various facets of the impacts of the external environment.

They need to recognize that the external environment has many aspects that can significantly impact a firm’s operations. They need to undertake an analysis of the environment regularly.

This is particularly important for the reason that developments/changes in the remote environment influence business organizations. They also need to understand the influences of changes in the industry environment.

Managers are benefited in several ways when they have a deep understanding and appreciation of the impact of environmental factors on business:

A manager must clearly understand the environment, irrespective of its external or internal nature.

Normally, you would not go for a walk in the rain without an umbrella, because you understand the environment and know you can get wet when it rains.

Similarly, suppose a manager does not know and understand the organization’s environment. In that case, he or she will definitively get wet or dry, and the organization is also in today’s fast and hyper-moving organizational environment.

Better knowledge. Sharper Insight.

Business Environment: Meaning, Types, Why It Matters

Updated on April 11, 2022 · By Ahmad Nasrudin Tag: Business Environment , Strategic Analysis

Business Environment Meaning Types Why It Matters

The business environment is getting more dynamic in recent years. Technology, consumer tastes, and international policies change at a quick pace. The change could bring past competitive advantage to competitive disadvantage, or vice versa. It also forces companies to rethink their competitive strategy .

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Definition of the business environment

The business environment refers to the set of conditions or forces that affect the functioning of the business. They may be outside or inside the organization.

Understanding the nature of the business environment and their changes is a vital part of business analysis and in designing competitive strategies. That’s to make sure the company has the right success strategy, not only now but also in the future.

Business environment

Types of Business Environments

Broadly speaking, the environment in which the business operates consists of two categories, namely:

Internal environment

The internal environment consists of organizational structure, corporate culture, and company resources. They are in control of the company. I mean, companies can change them to adapt to the external environment and to achieve goals.

External environment

Some experts offer different classifications for the external environment. And, here, I will refer to Thomas L. Wheelen’s book “ Strategic Management and Business Policy. ” He divides the hierarchy of the external environment into three levels, namely:

Natural physical environment consists of physical resources, climate, and wildlife. They are the outer environment and affect the other two environments (societal environment and task environment).

Societal environment includes components of PESTEL analysis but excludes environmental factors. So it consists of politics, economy, social culture, and technology factors. Why exclude environmental factors? The reason is, any change in the natural environment can have implications for changes in political and economic, socio-cultural, and technological policies, but not vice versa. For example, global warming pressures affect how governments take economic policies. It also affects the community in adapting to these changes. But, both the government and the people, they cannot influence global temperatures. I mean, we can not lower the global temperature drastically. We just adapt by doing environmentally-friendly activities, reducing the effect on rising global temperatures. For this reason, environmental factors should be at a higher hierarchy (i.e., at point 1).

Task environment covers interactions between the company and its stakeholders. They consist of the government, special interest groups, customers, competitors, trade associations, trade unions, creditors, and the community.

Next, I present some useful analyzes briefly to help you understand the business’s external environment:

The PESTEL analysis details the variables of political, economic, socio-cultural, technological, natural, and legal forces that affect business operations. The significance of each variable to companies varies, depending on the type of industry. Interest rates, for example, affect commercial banks more than manufacturers.

The industry cycle tells you what phase the industry is in. The cycle consists of introduction, growth, mature, and decline phases. Each stage has different implications for sales growth, marketing, and competition strategies.

Porter’s Five Forces explains to you why profitability in specific industries is higher than in other sectors. Porter then details the five forces that affect profitability (1) the bargaining power of buyers, (2) the bargaining power of suppliers , (3) the threat of substitution, (4) the threat of new entrants, and (5) rivalry between companies within the industry.

Stakeholder analysis is critical to answering whose interests should be considered when developing or implementing a strategy. You should systematically gather and analyze information about who the company stakeholders are, how they affect the company, and how significant their impact on the company.

Strategic groups help you to identify who is the most direct competitor. Not only that, through this analysis, but you would also know on what basis they are competing.

Key success factors articulate what companies should do and how to do it well. Breaking them down is critical for achieving the goals outlined in the strategic plan.

Why should you understand the business environment?

The business environment affects the success and profitability of the company. Their changes affect the company’s strategic decisions. Some might have indirect direct, while others have a direct impact.

The business environment exposes company performance and strategy. For examples:

How big the impact of each factor to the company, it depends on the industry in which it operates. Devaluation will have greater exposure to exporters than property insurance companies. Likewise, shifts in consumer tastes have more impact on food producers than banks.

In most cases, companies have control over the internal environment, but not the external environment. Companies simply only adapt to any changes in the external environment. And, in this case, the uncertainty and magnitude of the effect should be your consideration. The higher their uncertainty and influence, the greater the strategic challenges for the company.

The dynamic external environment is forcing companies to respond quickly and appropriately. Scenario planning, intuition, and learning approach are essential to respond. It also requires a flexible organizational structure so that decisions can be taken quickly.

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