Understanding Your Business Environment - Part 1

The first time Fyneface Abiowei heard the words “business environment”, he thought it meant his business address or the neighbourhood where his business was located. Well, he was not completely wrong, but the phrase means a whole lot more.

A business organization cannot exist in a vacuum. It needs living persons, natural resources and places to exist. The sum of all these factors and forces is called the business environment.

The business environment therefore can be described as the sum of all external and internal factors, which influence the development, performance and outcome of a business.

On the basis of the extent of relationship with a business entity, the environmental factors may be classified into different categories or levels. There are broadly two types of environment: the internal environment, i.e., factors inside the firm; and external environment, i.e., factors external to the firm which have impact on it.

The internal factors are generally considered as controllable factors because the company has direct control over these factors; it can amend or change such factors as its human resource, machinery, organisation and functional means as well as marketing mix to suit the environment.

The external factors, in contrast, are by and large beyond the control of a company. The external or environmental factors such as the economic factors, socio-cultural factors, government and legal factors and demographic factors are therefore generally regarded as uncontrollable factors. However, it is worthy to note that a firm may not always have complete control over all the internal factors while it is sometimes possible to change certain external factors.

Although business environment consists of both the internal and external environments, many young entrepreneurs often confine the term to the external atmosphere of business.

Now let's take a look at critical intrinsic elements of both sectors of the business environment.

1. INTERNAL ENVIRONMENT a) Physical resources and technological capabilities

Physical resources such as plant and equipment as well as technological capabilities of a firm determine its competitive strength, which is an important factor determining its efficiency and unit cost of production. Research and development (R & D) capabilities of a business determine its ability to introduce innovations which will in turn enhance profitability.

b) Vision, mission and objectives

The business domain and policy of every firm including priorities are guided by the vision, mission and objectives of the company. This strategic planning component helps start-ups define their dream, set their goals and define ways to meet those goals.

c) Management structure

The organisational structure and the composition of the management are important factors influencing business decisions. Some management structures and styles delay processes while some others facilitate quick decision-making. The management team in most cases sets the direction for the profitability of a firm while also overseeing the performance of the organization. The quality of this team is a very critical factor for the growth and profitability of a company. MSMEs present extreme cases in this respect. At one end, there are businesses with highly qualified and responsible board and, at the other end, there are entities which do not possess a competent management team.

d) Human capital

The characteristics of the human resources such as skill, knowledge, commitment, attitude etc. could contribute to the success or failure of an organisation. The human capital of every firm is critical, especially for startups, considering the fact that most start-ups have only a few employees. The strength of a firm's employees is an essential internal business factor. Motivated, hardworking and talented workers generally produce better results than unmotivated, less-talented employees. Your business processes and relationships between departments and employees also significantly impact business effectiveness and efficiency. In a highperforming workplace, employees not only have talent, but they work well together and collaborate on ideas and resolutions.

e) Company image and brand equity

The image of the company matters while sourcing for finance, forming strategic alliances, franchising and launching new products etc. Brand equity is also relevant in several of these cases. Brand equity refers to a value premium that a company generates from a product with a recognizable name when compared to a generic equivalent. Businesses can create brand equity for their products by making them memorable, easily recognizable and superior in quality and reliability in comparison to others. To be continued….