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What Is Business Environment? – Definition & Factors

Businesses do not operate in a vacuum; they operate in an environment. In this lesson, you’ll learn about the business environment, including what makes it up. A short quiz follows the lesson.

Business Environment Defined

Business environment is the sum total of all external and internal factors that influence a business. You should keep in mind that external factors and internal factors can influence each other and work together to affect a business. For example, a health and safety regulation is an external factor that influences the internal environment of business operations. Additionally, some external factors are beyond your control. These factors are often called external constraints. Let’s take a look at some key environmental factors.

External Factors

Political factors are governmental activities and political conditions that may affect your business. Examples include laws, regulations, tariffs and other trade barriers, war, and social unrest.

Macroeconomic factors are factors that affect the entire economy, not just your business. Examples include things like interest rates, unemployment rates, currency exchange rates, consumer confidence, consumer discretionary income, consumer savings rates, recessions, and depressions.

Microeconomic factors are factors that can affect your business, such as market size, demand, supply, relationships with suppliers and your distribution chain, such as retail stores that sell your products, and the number and strength of your competition.

Social factors are basically sociological factors related to general society and social relations that affect your business. Social factors include social movements, such as environmental movements, as well as changes in fashion and consumer preferences. For example, clothing fashions change with the season, and there is a current trend towards green construction and organic foods.

Technological factors are technological innovations that can either benefit or hurt your business. Some technological innovations can increase your productivity and profit margins, such as computer software and automated production. On the other hand, some technological innovations pose an existential threat to a business, such as Internet streaming challenging the DVD rental business.

Internal Factors

Organizational culture is the framework of values, vision, norms, and customs shared by the members of an organization. Your business culture affects how the employees in your business interact with each other, its customers, and other stakeholders.

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Organizational structure is the manner in which the business is organized to conduct its activities. Organizations can be organized fairly flat, with very few levels of hierarchy, or organized very vertical, with many levels of hierarchy. The manner in which an organization is structured will affect how your business is managed and how much control individual employees have over their work.

Management structure is the manner in which your business is managed. Management may be centralized, where all decision-making is made at the top and filtered down throughout the business, or it may be decentralized, where the decision-making is distributed throughout the organization and decisions are made closer to the relevant work activities or problems.

Lesson Summary

Business environment includes the external and internal factors that influence a business. External factors include political factors, macroeconomic factors, microeconomic factors, social factors, and technological factors. Internal factors are factors from inside the organization that affect a business, such as organizational culture, organizational structure, and management structure.

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