There are four main factors in business environment which play an important role in determining the outcome of business. These external factors include political, legal, economic, social, cultural and technological. The division of these factors is also known as PEST analysis which helps business enterprises immensely in coming up with strategic approach to their business activities.
Economic environment refers to the overall nature of economic system of the country. From structural framework of the economy to the economic policies of the government, the nature of factor endowment, business cycles, the socio-economic infrastructure are the important factors that are taken into account. Economic factors ranges from small to big ones as they include local and international trends, the rising cost of raw material and entry of a new rival into the market. In other words, economic environment operates at two levels: macro and micro.
Macroeconomic environment refers to the overall national and international economic situation in which the company operates. It is more likely that a business will do much better in case the local and international economic is showing signs of growth as opposed to recession. The governmental policies intended to put economy on track directly affects taxation, interest rates and exchange. Any of these effects always leave a big impact on the productivity of companies.
On the other hand, microeconomic environment is made up of factors specific to a company operating in its own particular market. For example, one company may be facing stiff competition posed by its competitors while other company’s situation may completely be different. Variably, companies on a microeconomic level may either face rising cost or fall in it. Precisely put, microeconomic environment include external customer, agents and distributors, suppliers and competitors.
A successful businessman always keeps any aye over the external economic factors that may influence or affect the business and foresees the marketability of his product to ensure maximum profit at minimum cost.
Socio-cultural factors including costs structure, customs and conventions, cultural heritage, and mobility of labour always have a sweeping effect on the business environment. They also include attitudes towards working conditions such as length of working hours, equal opportunities for different ethnic and gender groups. The social and culture environment also contains social trends, for example, demographic changes and pay scale. Ethical issues particularly those related to environment leave a major impact on the actions and image of business.(Chris and Ian, 2009)
The political factors have a huge impact on the business environment. The importance of political factors becomes even more pronounced when it comes to conducting a business internationally. The stable/unstable political environment determines the laws and regulations related to taxation. The government’s policy on the economy and its treatment of different peoples, and cultures plays leaves an enormous impact on the business environment. For example, it may become impossible for businessmen to continue their businesses internationally if their home country wages war on the country in which their business was being run. The bi-lateral trading agreements between different countries such as EU, NAFTA, ASEAN also affect the business environment internationally and locally.
Legal environment encompasses the flexibility and adaptability of law and other legal rules that govern the business. Rulings and verdicts of the courts regarding the limitations of any business also affect the business and its mangers immensely.
Over two decades, the unprecedented rise in technological innovations has brought about a drastic change in business organizations. Now, the use of technology determines the productivity and organization of a business. The rampant use of technological gadgets, computers, and other business-related electronic devices has changed the nature of workplace in particular and business organizations in general.
Moreover, technological revolution had given way for rapid communication to such an extent that now people can perform their assigned duties while travelling or from home. The increasing use of internet, online banking and new generation mobile phones have contributed significantly to the modern business environment.
Nevertheless, it is necessary for the business organizations to recognize that the effect of PEST factors does not always remain constant. They keep on changing from time to time and context to context. Government policies and laws represent social attitudes whereas technological factors determines rise or fall in costs and productivity of a company. Along with the interaction of these factors, we must be aware of the fact that business environment is constantly changing. Some changes are gradual while others are revolutionary. (Sloman, 2006) Thus, the companies should plan their strategies keeping in view all the above mentioned factors to ensure success and maximum productivity.
Slomon (2004) Economics for Business, Pearson Education
Chris, Britton, and Ian Worthington (2009) Business Environment, Pearson Education Canada