TOPIC 2- BUSINESS AND ENVIRONMENT

INTRODUCTION
-Without society, business would be non-existent. It is society that creates and sustains business
and the relationship between the two, therefore, is of fundamental interest not only for business
managers, but also for students of business. It is a give-and-take relationship.
-Business takes from society such things as laws and regulations, norms and values, rates and
prices, skills and techniques, raw materials and labour. Society, on the other hand, takes from
business such things as products (goods and services), employment, environmental conditions
and economic welfare.
-For either party, what it gives to or takes from the other may be advantageous or
disadvantageous. Since the existence of business depends on society, business has the burden of
managing the business-society relationship to ensure that it is as good and favourable as possible.
This requires the business to perpetually analyze its environment and adjust to it accordingly.
-Business environmental analysis has two major dimensions, namely: that which focuses on the
macro and micro environmental forces interacting with business and the other which focuses on
business, social responsibility and ethics. These two dimensions comprise the framework of our
discussion in this chapter.

1. MACRO (EXTERNAL) ENVIRONMENT

-In striving to achieve its objectives, business interacts with macro or external environmental
forces that affect its operations.
-The external environmental forces may offer opportunities or pose problems for a business in
attaining its objectives. A business that wants to maximize the attainment of its objectives will
try to take advantage of the environmental opportunities and overcome or minimize the impact of
the environmental problems. A business ability to take advantage of the opportunities and
overcome the problems, however, depends on the strengths and weaknesses of its resources (the
micro or internal environment).

-The external environment of business is dynamic rather than static.

-It is changing continuously and rapidly. The forces are also interrelated, therefore, a change in
one kind of force affects and may be affected by the other forces. This makes it difficult to
analyze and trace the sources of changes in particular forces. A change in the external
environment may require a business to re-adjust its business strategy (how it is going about its
business) in order to cope.

-The external environmental forces may be classified according to the political – legal forces,
social cultural forces, economic forces, competitive forces, technological forces, and
demographic forces. This is a convenient classification, although certain factors may belong to
more than one class of forces. The management of a firm usually has limited or no control over
the macro environmental forces. It is this that defines their being external to the firm.

1. POLITICAL – LEGAL ENVIRONMENT

This environment comprises the following factors:

1. Laws and regulations (of both central and local government) such as, laws and
regulations governing: labour and industrial relations, prices, products, advertisements,
formation, location and administration of business taxes and competition.
2. Political stability, for example, stability in the policies and system of a government
3. Political climate, that is, whether hostile, sensitive on certain issues, or favourable.
4. Judicial system, for example, the procedures adopted by the courts administration of
justice, and the degree to which certain laws and regulations are enforced.
5. National pressure groups such as consumer associations and trade unions.

2. ECONOMIC ENVIRONMENT

This environment is determined by the following states of the economy

1. The stage of the business cycle an economy is in, such as, depression, recession,
recovery, or prosperity.
2. The inflationary of deflationary trend in the prices of goods and services
 3. Monetary policies, such as interest rates and devaluation or revaluation of the country’s
currency relative to other currencies.
4. Fiscal policies such as tax rates for firms and individuals
5. Balance of payments such as surpluses.

3. SOCIAL – CULTURAL ENVIRONMENT

The major factors in this environment are;

1. Social factors like the institutions of family, religion, education, health and recreation.
How these are organized and the role they play in a society affect business activities in
the society. For example, the family may be of the nucleus or extended type, each of
which has implications on business.
2. Cultural factors like concepts, social values, beliefs, customs, life styles and desires.
These factors strongly affect the operation of a business enterprise; culture will be
reflected, for example on how a given people carry out farming, entertainments,
education, feeding and worship.

3. TECHNOLOGICAL ENVIRONMENT

This environment, although may be regarded as distinct, is in fact an aspect of the social-cultural
environment. This is because technology is part and parcel of culture. For example, the tools
and equipment used by a people in farming is part of the people’s cultural life in farming.

The major factors that comprise this environment are;

1. Raw materials used in producing certain things
2. Products people consume
3. Techniques and skills
4. Tools and equipment
Technology affects such major business functions as production, marketing, personnel and
finance. How each of these activities or functions are carried out will depend on the available
technology.
 5. COMPETITIVE ENVIRONMENT

Any business enterprise faces two types of competition, namely:

1. Enterprise competition, which refers to competition from firms whose products are
similar to that of the other firm. For example, all cinema firms in Nairobi are in
enterprise competition.
2. Generic competition which refers to completion from firms whose products although
different from the firm’s products are, however, used for the same purpose as that of the
firm. For example, cinema firms in Nairobi are in generic competition with bars and
night clubs, newspaper and magazine firms, cultural centres and drama theaters.
Although the products of these firms are different, they serve the users informational and
entertainment needs.
3. The state for competition a firm faces must always be examined taking into consideration
the entry and exit of major competitors (both enterprise and generic competitors),
substitute and complementary products for the firm’s current products and major changes
in competitor’s strategies of operations.

6. DEMOGRAPHIC ENVIRONMENT

This is closely related to the social environment and may be considered as part of it.
Demographics refer to the characteristics of a population, such as size of the population, age
distribution, income and its distribution, education distribution, sex distribution, size of families,
distribution of religions and distribution of professions. Changes in the demographic factors may
favour or disfavor a business in its endeavor to achieve its objectives.

Physical environment, although lacking societal dimension, may also be considered among the
most important macro-environment forces that affect business. The physical environment
includes such factors as topography or relief, climate and infrastructure (roads, water supply,
electricity, telephone, security, banks and insurance). These physical factors also may favour or
disfavor a firm in the pursuit of its objectives.
 2. MICRO (INTERNAL) ENVIRONMENT

-The internal environment is composed of a firm’s resources and comprises factors which a firm
can effectively use in adapting to the changing external environment.
-Unlike external environment, the internal environmental factors are largely within control of the
management of a business enterprise.
-This element of control is a key factor in regarding these factors as being internal to a firm. The
factors include the following:
1. The resources that are mainly tangible, such as Production/operations factors e.g. plant,
equipment, machinery and tools; Marketing factors e.g. sales force, channels of
distribution, and existing advertisement; Personnel/ labour relations factors e.g.
employees and relations with trade unions and Financial/ Accounting factors e.g. funds
available and available sources of credit/loans
2. The resources that are mainly intangible, such a location factor e.g. availability of present
location and possibility of moving into other locations. If necessary, public image or
reputation; research and development and time

-Like the macro factors, micro-environmental factors are also inter-related and interacting. For
example, the marketing factors may be affected by the personnel and financial factors. A
decision, for example to aggressively sell in a region must also take into account the personnel
and financial abilities of the firm.

-A firm’s resources represent for the firm the strengths and weaknesses with which it face the
challenges of the external environment. The resources determine the firm’s ability to cope with
the changes in the external environment. For example, if a major competitor for a firm closes up
business, the ability of the firm to take over the competitor’s market share will depend on the
firm’s marketing, personnel and financial resources available. These resources may favor or
disfavor the firm in this pursuit. The strengths in a firm’s resources will enable it to exploit
environmental opportunities or to overcome the problems therein.
On the other hand, weaknesses in the resources make it difficult if not impossible to exploit an
opportunity or overcome a problem.