- Business Environment can be classified into two main types; Economic Environment and Non-Economic Environment
The economic environment refers to:
(a) the economic conditions which are prevailing within the country or region in which the business is operating;
(b) the economic policies and regulations which are put in place by the government of the region or country and
(c) the economic system in which the business is operating.
The Economic Conditions Prevailing in a Country or Region
The economic condition in a country or region refers to those economic factors which have great influence on the business organization. For example, the country’s or region’s Gross Domestic Product; the country’s per capita income, the available market for goods and services of the business, the foreign exchange reserve of the country, how much capital is available in the country for business to use, at what rate the economy is growing and how strong the country’s capital market is. All these factors come together to form the economic condition in which the business is operating. A favorable economic condition is good for businesses while an unfavorable economic will present some challenges to the businesses operating in that region.
The economic policies and regulations which are put in place by the government of the region or country.
The policies formulated by a government will either directly or indirectly influence businesses operating in a country or within a region under the jurisdiction of that government. These policies once formed may not remain static; they may be changed from time to time. Important economic policies include: policies formulated to regulate a particular industry such mining industry; the fiscal policy (tax rate, government expenditure etc); monetary policy (how much money is injected into the economy to control inflation) and export policy (a set of guidelines from the government about import or export). Because governments keep changing some of these policies, businesses can be affected either favorably or unfavorably by these policies since business must function according to these policies.
By economic system we mean the three main type of economic systems which countries across the world may adopt. These are: socialism, capitalism and mixed system (a mixture of capitalism and socialism).
Socialism or socialist economic system: this is an economic system in which everybody in the country owns the resources and factors of production equally. Factors of production are capital goods. labour and natural resources, and the ability to put all these factors together to produce goods and services also known as entrepreneurship.
Capitalism or capitalist economic system: this suggests an economic system in which private individuals or companies own the factors of production or resources used in producing goods and services.
Mixed economic system: in a mixed, both capitalism and socialism are mixed together. In a mixed system, both the government and the private individuals or private entities own the factors of production.
Non-economic environment is made up of the laws in the country or the legal provisions in the country, the social environment, the natural environment, the technologies available to businesses in the country (technological environment), the political and demographic environment existing in the country. All of these factors will influence the decisions of the businesses which operate in the country or region. A change in any of these factors that constitute the non-economic environment will have consequences for business managers whose companies are located in this country.
This is formed by the traditions of the people in a country; the traditions of the people; the beliefs of the citizens; the level of poverty of the people living in the country; and the literacy level of the people in the country. An example of how social environment influence business is that when there is a festival in a country, the demand for new clothes, flowers , body powders, alcohol etc., increases.
Political environment signifies the stability of the government of the country or region in which the business is located; the laws which the government promulgates; and the political system of the region. All these can affect the decisions that a business manager will make. For example, a stable political environment can attract business people to invest in a country. Another example is that, when the laws on copyright are weak, a business manager will be very unwilling to open up on an invention he has introduced to the public.
This refers exclusively to the laws that govern the way of doing business. For example, there is a law on what is permitted in business.
- The natural environment describes geographical and ecological factors which affect businesses in their operations.
- How much natural resources are available in a country, what are the climatic or weather conditions prevailing in the country and what is the nature of the country’s topography.
- These are the things which constitute the natural environment of the country.
- For example, a country in the tropics may decide to move away from producing warm clothes and concentrate on light casual wears because the climatic condition does not create market for warm clothes. Most sugar factories may be set up close to towns and villages where the people grow sugar cane because building the factories farther away from the sugar cane farms could make the sugar more expensive since the business must pay extra money to transport the sugar cane to the factory