Relationship Between Business and its Environment


By: Site Engineer, Staff

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A business whether small or big, simple or complex, private or public, etc., is created to provide competitive goods and services at a competitive price. Businesses in developing countries have been classified as small, medium and large.

However, this article is focused on small businesses, which can be defined by the criteria of the project cost, capital cost turnover per employee, etc.

Every business is operated in an environment that could both be micro and macro as could be observed below.

Inter-Relationships Between the Business System and its Environment

A business may be regarded as a system, which can be described as linkages of input flow (one energy, materials or information) from a source in the external.

Environment, a transforming mechanism or process (a machine or a technical-human organization), and flows of output or outcomes, provided to users. Every purposely business system is embedded in the environment with which it has to interact.

Purposeful business system influence and are influenced by their environment principally because the business system’s inputs are derived from and the outputs are consumed by the same environment.

In this connection where the outputs to the environment consist of products, services as well as “integrity perception”, the inputs include:

  • Market information
  • Legal and social restraints influences and
  • Human material financial technology information and knowledge resources

The environment may be defined as the set of all objects, which are influenced by and/or influence the system of interest. The environment is characterized by complexity, turbulence, uncertainty and risk and hence the need for the entrepreneur to identify and recognize his/her own relevant and negotiated environment from the cascading environment.

The entrepreneur also needs to scan the environment continuously particularly as the business environment offers both opportunities and threats. The dependence of the business system’s viability on its relationship with the relevant environment is especially important in these times when the rate and magnitude of changes in technology and consumer taste force frequent internal changes in production, processes and other activities.

Indeed, the business must learn to and develop the capacity for responding and adapting to environmental conditions that were not considered at the time it was designed or setup; otherwise, it will not be able to survive in the long run. Examining survival and viability is closely tied up with the production of competitive products or services at a competitive price.

This environment can be internal and immediate or external and internal; it may also be described as either micro or macro. Whereas a small business system is largely affected by its relevant environment-internal and immediate, there is a tendency for the external environment to become increasingly important as the business grows in size and sophistication.

Thus, here is a high level of interaction between the business system and the environment. The interaction is inspired and maintained by the entrepreneur; a person or investor who organizes and manages a commercial undertaking after he or she has determined “what to do”, “how to do it”, “when to do it” and “where to do it”. This is because of the need to determine the costs and receipts as well as the associated risks before deciding to invest in a particular business.

Then the fundamental questions in respect of the business mission have been settled, the entrepreneur would have to choose an appropriate structure and strategy which may be corporate, competitor or client-oriented. In this connection, it is pertinent to stress that every entrepreneur, whether he/she runs a small-medium or large business faces an identical problem; the need to maintain a viable business system that is far more complicated than he/she personally can understand.

Classifications of Business Environment

The business environment may be classified as physical, socio-cultural, political, technological, legal, economic-financial government policies, etc.

1. Physical Environment

The physical environment relates to the area, topography drainage system, climate, vegetation, and soil types as they affect the sources of inputs, the conversion of inputs to output at the location of the business and the consumer locations.

For instance, Nigeria has an area of 941,849 square kilometers, incorporating a wide range of fertile soils and diverse bio-physiographic features between rainfall and evaporation. In this respect, though the physical environment varies from one state or local government area to another, the important thing is for the entrepreneur to recognize which physical factor (and how or what degree) affects his/her business.

As a result of the favorable physical environment in Nigeria, it has principal raw materials that provide opportunities for the establishment of industries.

2. Legal Environment

An entrepreneur is obliged by law to register his/her business activities. There are three options opened to an entrepreneur to conduct his/her business under Nigerian law. These include trading under the provisions.

  • The registration of business names act of 1961.
  • The partnership laws of the various states of the federation; and
  • The Companies Act of 1968.

Each of the aforementioned methods of conducting business is adequate and sufficient depending on the nature of the business to be transacted and the peculiar situation of the entrepreneur.

Also, the entrepreneur should be familiar with business regulations, incentives taxation, customs, and excise duties import and export arrangement, etc. For instance, to promote small businesses the government has introduced.

  • Pioneer status” or tax holiday to pioneer enterprises for a period of 3 to 5 years.
  • Import duty relief on machinery.
  • Liberalization/cancellation of location approvals for small business

3. Financial Environment

The financial environment of the business is very crucial to its viability. In this connection, decisions about optimum capital investment operating capacity, the appropriate level of pricing-sources and application of funds, etc., must be considered.

In considering capital investment decisions, financial and nonfinancial evaluations are essential.

The factors involved in financial evaluation are:

  • The initial cost of fixed assets.
  • The scrap or second-hand value of fixed assets.
  • The investment in working capital (stock + debtors creditor)
  • The release of working capital.
  • The estimated life of the project.
  • The amount and timing of additional income additional costs cost saving and cost income.
  • The effect on the related operations of business-government policy.
  • The company’s cost of capital.
  • The availability of resources.
  • The urgency of the project and expected inflation rates.

In effect, business decisions making involves cost analysis (cash outflow) and benefits (cash inflow). The cost elements that may be classified as fixed or variable, direct or indirect include:

(a) Project /business outlays consisting of

  • Investment cost.
  • Research and development cost.
  • Cost of operation and
  • Maintenance and replacement cost.
  • Associated costs incurred by beneficiaries
  • Opportunity or alternative cost.

It may be necessary to break down the cost into:

  • Naira (or foreign exchange) expenditure
  • Costs that can be measured in Naira
  • Costs that can be quantifiable, and
  • Non-quantifiable costs

4. Socio-Cultural Environment

An entrepreneur should possess a fair knowledge of the sociopolitical history of his/her environment and appreciates the sensitivities therein, which might affect his/her business adversely. While an entrepreneur does not have to be a politician to be a successful business person, nevertheless, he/she needs to be socially responsible and politically sagacious.

The social environment pertains to the social norms’ tastes and habits of the target population transport and communication as well and demands and supply situations. An entrepreneur should be familiar with the sociology of the sensitivities therein which might affect his business.

5. Economic Environment

To ensure corporate viability, the entrepreneur should be familiar with:

The General State of the Economy: in this respect, the general economic environment can best be described as unstable. This is not only because the country operates mixed economic strategy, the mix of which has not yet been determined but also because the economy is currently going through intensive commercialization and privatization exercises to salvage the economy and reset it on a healthy course of reconstruction, growth, and development.

  • National economic policies especially those relating to and medium entrepreneurs.
  • Sources of finance and the prevailing terms.
  • Banking regulations and special concessions to small enterprises.
  • Roles of development and commercial banks.
  • Economic intelligence information on economic activities both current and future and
  • The budget for the year.

6. Technological Advancement

The application of scientific principles to business problems is known as technology. The improvement in machines methods materials, management, etc., the results of these are called technological advancement and this has become one of the most important forces in the business world.

The making of technological advancement depends on a solid foundation of population expansion resources and educational facilities as well as the encouragement of the inventiveness and innovation of the individual.

For most people, the prime benefit of technological advancement is the vast increase in goods and services it makes available to society. Technology multiplies the output of a single worker. It leads to a vastly increased efficiency of products. It sets to reduce prices and results in a higher standard of living; indirectly technology has led to a reduction in working hours to higher wages and too much leisure time for workers.

7. Political Environment

The political and legal issues are closely intertwined with the social environment. The attitudes and actions of political and government leaders, legislators, do change with social demands and beliefs. The government affects all organizations in every aspect of life. Concerning business by stimulating economic developments and it is the biggest customer purchasing goods and services and could constraint business with policies that might lead to a business failure, such as a ban on certain forms of existing and non-existing businesses.

Tackling the Environmental Changes

The environment refers to the prevailing climate and underlying circumstances in which business in an economy is conducted. Business activities do not take place in a vacuum. If the environment is conducive, naturally it produces an increase in the spate of economic activities and consequently the growth of the economy. Where the environment is hostile it discourages investment stifles initiatives and renders the economy stagnant.

The environmental factor is crucial in the decision on the nature of the business venture to undertake. The macro-economic environment provides indicators that encourage potential entrepreneurs to start their business ventures. By their nature, small-scale businesses require relatively and comparatively, stable environments to implement long term goals and adjust adequately for the ever-dynamic environmental stimuli. In an unstable and unpredictable environment, economic activity is stifled. New and existing small-scale businesses have to work extra hard towards remaining solvent or fulfilling their mandate before even considering expansion.

Generally, the government has a crucial role to play in creating a conducive environment for the progress of development activities. This could be through the adoption of public policies perceived as being in the best interest of society. For instance, recent moves being made to reserve funds contributed by a consortium of banks for lending to small-scale businesses is an encouraging policy measure that could succeed in revitalizing the sector.

The environment provides the background in which business ventures operate. This could be internal or external. Internal environmental actors relate to those factors within the organization and therefore subject to its control. These could be staff matters reduction or increase in production ratio decision to purchase raw materials ahead of time utilization of financial resources, research and development and diversification of production or service lines.

The nature of an environment within and surrounding a firm or venture is often taken for granted by those who work within it. But it could be vitally important in determining the structure and fortune of the venture.

Some of these vital points to note include:

  • Threats or dangers in the environment are best countered by power cultures. When this occurs mergers and take-over rear their heads as examples of threat and danger. But for the small-scale entrepreneur, mergers and takeovers could mean liquidation and collapse of the business venture;
  • Changes in the environment require a culture that is sensitive, adaptable and quick to respond to the growing and emerging challenges;
  • Diversity in the environment requires a diversified and flexible structure and approach;
  • With a static environment where little or no changes are anticipated, entrepreneurs are still expected to make adequate provisions for and disruption. In practice, however, the static environment rarely exists particularly in an environment such as ours with its customary turbulence observed in a competitive market economy.
  • With a turbulent environment where signals and warnings are not given ahead of time and where laws, guidelines, and policies are formulated modified or changed without prior notice the small-scale entrepreneur must devise a plan complete with proactive measures to tackle such unexpected outcomes and policy summersaults. Entrepreneurs must make adequate provisions towards insulating themselves in managing such turbulence.

The dynamism in the environment is reflected in new developments and advances in information technology, law, education, household, consumables and changing public tastes and attitudes. The small scale business executive must brace up and adapt to these changes if he must survive in the market place. This is even imperative due to the need to keep abreast of new trends in marketing.

In terms of diversity in the environment earlier enumerated, entrepreneurs, are advised to formulate diversification strategies in identifying with their business ideas.

This could involve product technology, goal or internal goal diversification.

  • Product Diversification: This involves adopting new and novel approaches to producing existing products. For instance, instead of producing soap in tablets the entrepreneur could manufacture it in powdered form for easy dissolution in water. The packaging of detergents in polythene emerged from the thinking into product diversification. Each product must have its peculiarities in terms of market, image need for servicing quality among others.
  • Technology Diversification: This involves the base of the business venture. Is it on one technology or a variety? If it is a variety, are the differences between them significant? Technology is perceived as a finished product. Consequently, each should stand put uniquely in its importance and contribution towards achieving the entrepreneurial mission and objective of the small-scale venture.
  • Goal Diversification: Does the enterprise have a set of goals or mission statement to which all divisions and departments subscribe? Or do the goals vary?

On a general note, internal goal differential is more appropriate and more common when the market environment or technology is changing more rapidly.

For instance, a venture that produces plastics grows faster and changes faster than one that produces tin containers. Therefore the plastic producer is more prone to internal goat diversification than the latter.

Forecasting Changes in the Environment

Due to the dynamism in the environment in which the venture operates, it is necessary to forecast trends in the economy and appreciate what implications these changes mean for the venture. Besides the entrepreneur is advised that while it is useful paying attention to popular opinion, greater emphasis should be focused on the opinion of the elite; public opinion is crucial but in the final analysis the opinion of the elite forms the core of public policy.

There are several approaches for forecasting changes in the environment. Many of these are scientific, and therefore might not be available and accessible to the small-scale entrepreneur. The entrepreneur should then resort to simple but careful observation. He should pay adequate attention to history for in the final analysis the past determines the present which in turn shapes the future. He could also obtain tips from experienced operators in the field.


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