5 Factors that Influence Business Environment
It is important for every business organization to interact and transact with its environment because the business environment has a direct relationship with the organization. The success or failure of an organization is primarily established by the effectiveness of its interaction with its environment. Kotler and Armstrong (2004) explain that different restrictions are imposed on all organizations by the environment. The enterprise has little influence on the environment and therefore, it is important for the company to identify with the environment of its operation and devise its policies in relation to the forces in that environment.
According to Shaikh (2010), any policy undertaken in a company is always affected by its environment. Several constraints are imposed on the enterprise by the environment and it imposes huge impacts and influence on the scope and direction of the company activities. In the US the nature of the business environment is dominated by the government regulations with a view to ensure a certain level of economic life to the people.
Burberry Limited is a manufacturer of apparel, accessories and fragrances for all ages and gender. It has branded stores and franchises globally, and sells through allowances in third-party stores. Burberry has more than 500 stores that operate in more than 20 countries. Burberry is listed on the London Stock Exchange. It is also a component of the FTSE 100 Index. It is considered as the 98th most valuable brand globally. The company has implemented different policies and strategies since introduction to make its business successful. For example, in order to reinvent its luxury brand status, the company launched the Prorsum designer collection. It has also utilized licensing and brand extensions to plead to younger customers of their fashion. The company employs trade-marketing and advertising to market its products. A variety of labels are used to distinguish the company garments from imitations. The company targets people involved in hunting, fishing, skiing, archery, mountaineering, golf and tennis (Burberry 2012).
Business is affected by different factors which collectively form the business environment. These include economic, social, legal, technological and political factors. Business environment is therefore, the total of all external forces, which affect the organization and the business operations (Kotler & Armstrong 2004). These forces include customers, creditors, competitors, government, socio-cultural organizations, and political parties, national and international organizations. Some of these forces affect the business directly but others affect business indirectly. Business environments are categorized into three main categories; internal environment; operational environment; and general/external environment.
1. Environment Analysis-Political environment
The political environment of any country influences the business to a larger extent. This political environment is influenced by the political organization, philosophy, government ideology, nature and extent of bureaucracy, the country’s political stability, its foreign policy, defense and military policy, the country’s image and that of its leaders both locally and internationally (Shaikh 2010). For example a country’s policy that restricts the growth of multinationals in the market will automatically limit the business operations of the company hence its growth. Similarly, government policy that allows licensing that is liberal, liberal exportation and importation, inflow of foreign capital and technology, affects the business operation. Globalization as government policy too has influence on the business. Burberry was able to establish its first foreign outlets in Paris, United States and South America, and export its first shipment of raincoats to Japan because of the government’s globalization policy.
2. Economic environment
Economic factors that influence business are the collective nature of the country’s economic system, its structures, and economic policies, how the capital market is organized, and the nature of factors of production, business cycles, and socio-economic infrastructure. Any successful organization pictures out the external factors that affect the business, anticipates the prospective market situations and works to minimize the costs while maximizing the profits. When Burberry noticed the high demand of rainwear, it utilized this opportunity increasing its production in the market. Also, due to Japanese and American craving for prestigious designer goods, Burberry export business increased dramatically (Burberry 2012). Changes in demand are also one great factor that determines success and business performance. Still on the economic aspect, it is undeniable that all business and non-business organizations felt the impact of the 2008 economic crisis, which rocked the whole world. The trends on most business performances dropped during this period and Burberry experienced a low just like any other business. Performance trends in Burberry are expected to at least have a flow of returns that conforms to this trend.
In all economic situations low rates of interest encourage borrowing and the Federal government in a bid to improve this lowered the Federal fund rate from 6.5% to 1%. This was meant to better business the economic situation after 9/11. The demand for further lowering of the interest rates however, continued due to rising and high U.S current account deficit as portrayed by the above graph. This deficit peaked alongside the housing bubble whose onset began in 2006. The deficits elicited foreign borrowing to cushion effects by enhancing exports. The spin off led to a high demand of financial assets and this lowered interest rates whilst raising prices of the respective assets. The high borrowing fueled high citizen consumption in the period before the onset of the crisis and this consequently led to the raising of Feds fund rate which turned things in the situation that resulted. This trend portrayed by the graph shows how the economic situation may affect the economy and general spending and therefore the performance of any business within such an economy.
Similarly, the long-term view of the graphical representation below shows how the economic trends in business and household debt to Gross domestic product change with times and it is easily notable that in the periods of peak moments of the rate there is a high level of economic challenges such as the 1930s period and the 2000 to 2010 period. Therefore, it can be concluded that economic trends are indeed significant determinants of general economic and business performance.
3. Social environment
The country’s social environment affects the functioning of the business since it determines the value system of the society. Sociological factors establish the culture of work, labor mobility, work groups etc, hence, business operation of an enterprise. These factors include cost structure, customs and conventions, cultural heritage, peoples’ view towards wealth and income and scientific methods, seniority respect, mobility of labor (Shaikh 2010). All these factors have a big impact on the business. For example, peoples’ demand determine the kind of products to be offered for sale; this demand is consequently affected by peoples’ attitudes, customs, cultural values, fashion and other related forces. The code of conduct that is supposed to be followed by the business is determined by the socio-cultural environment.
The social changes in life also lead to new fashion trends that affect business in any part of the economy. For example, fashion-based demands are social based forces that lead to changes or increase in demand. The higher the demand as portrayed in line three demand, the higher the sales level as well as the business performance. The lower the demand as portrayed in line two the lower the level of returns attained.
4. Technological environment
Technological factors affect business concerning technological investment, technological application and the effect of technology on markets. Therefore, any technological advancement highly affects the business in a country. The type and quality of goods and services to be produced and the type and quality of plant and equipment to be used in a company, is determined by the kind of technology employed by that company (Mühlbacher, Dahringer & Leihs 2006). Burberry is extending its web reach so that its customers worldwide can view its brands. For example, the company is targeting Chinese shoppers directly by launching a site in China. This is because this target market accounts for 30% of sales in its London stores (Burberry, 2012).
5. Legal environment
The legal environment affects the business and its managers greatly. Legal factors involve how flexible and adaptable the law and legal rules that govern the business are. It also includes the exact rulings and court decisions. Legal provisions may also contribute to more or less income depending on the environment of operation. For example, Burberry Limited makes a considerable portion of its income from licensing, which amounts to about £109 million pounds. This is made possible as portrayed by the graph below because of laws and regulations in its foreign destinations of operations, which allow it to charge licensing fees.
Before implementing any business policy, it is important for the company to understand its business environment. Business environment determines the success or failure of this policy. Burberry Company should study its business environment before implementing its business policies. The company should identify with the environment in which it operates and formulate its policies in accordance with the forces which operate in its environment (Mühlbacher, Dahringer & Leihs 2006). The company should tackle the business environment well since the internal environment will reveal its strengths and weaknesses, while the external environment will reflect the opportunities available to the organization and the threats it faces. Through this the company will be able to implement business policies that will ensure success.
Burberry, 2012, “Burberry Ltd”, viewed June 6, 2012 from http://www.fundinguniverse.com/company-histories/burberry-ltd-company-history.html
Kotler, P & Armstrong, G., 2004, “Principles of Marketing”, Upper Saddle River, New Jersey: Prentice Hall.
Muhlbacher, H, Dahringer, L & Leihs, H. 2006, "International marketing: a global perspective", London: Thomson Learning,
Shaikh S, 2010, "Business environment" New Delhi: Pearson, 2010.
5 thoughts on “5 Factors that Influence Business Environment”
Environmental concerns are becoming more important with the wider impact of doing business increasingly recognized by consumers as a factor in their buyer behavior.
Lengthy but nice information
This is great work
Not all you said is understandable. The examples given are not general in nature. Legal aspects not explained properly
the recommendation section was well articulated. Especially when you highlighted the internal and external environment in relation to the strengths and weaknesses/ opportunities and threats respectively.