Business refers to the human activities directed towards satisfying customer needs through the production and distribution of goods and services, i.e. trade and industry. The environment is the aggregate of conditions, events and influences that surround and affect organisations. Business is environment-specific. Business Environment refers to the institutions or forces that affect the business organisation's performance. It is the sum of all internal and external components that influence business activities directly and indirectly. Thus, the business environment is the combination of the conditions and events inside and outside the business and affects it significantly.
According to Keith Davis, "Business Environment is the aggregate of all conditions, events and influences that surround and affect it."
Business environment normally refers to the factors outside the organisation that can lead to opportunities for or threats to the business. The following are some of the notable characteristics of the business environment:
- Aggregate of factors (sum of factors) — internal and external
- Dynamic
- Multifaceted
- Far-reaching impact
- Interrelated
- Complex
- Reciprocal
- Uncertainty
- Internal and external environment
Business environment refers to all the factors, situations, conditions, influences and institutions that affect the trade and industry directly and indirectly. It includes internal and external components. Internal components are controllable factors, whereas external components are uncontrollable factors.
- Aggregate of factors: BE includes events, conditions and trends in the environment. Hence, it can be stated as an aggregate of factors.
- Dynamic: BE continuously changes in shape and character. Globalisation and the development of technology have brought dynamism to every aspect of the business environment. The dynamism of the business environment makes it uncertain.
- Multi-faceted. Different people perceive the environmental changes differently. A particular change or development in the environment can be an opportunity for one organization but it could be a threat for another organisation.
- Far-reaching impact: The business environment greatly affects the capacity of an organisation over a long period.
- Interrelated: There are many components of the business environment which are related to each other. Hence, a change in one factor affects other factors. For eg: change in government may lead to a change in economic policy.
- Complex: Business environment consists of interacting events, conditions and influences arising from varied sources. Hence, it is complex in nature.
- Reciprocal: The relationship between business and environment is reciprocal. The environment influences business. Similarly, business firms may also influence the environment through lobbying.
- Uncertainty: Dynamism in the business environment makes it uncertain.
- Internal and external environment: The business environment includes internal and external components. Internal components are controllable factors, whereas external components are uncontrollable factors.
Components/Types/Factors/Classification/Influence of Business Environment:
The business environment is composed of the events and conditions inside as well as outside the organisation. Hence, it may broadly be classified into internal and external environments as discussed below:
1. Internal environment:
The internal environment may be defined as the conditions and resources which are internal to an organisation. It is also called a firm or resource environment. The internal environment is controllable by the firm in the long run. It determines the relative strengths andweaknessess of the firm.
Elements of internal environment:
Different components/elements form the internal environment of an organisation as discussed below:
1. Organisation's vision, mission, objectives and strategies: Goals are long-term desired outcomes of an organisation. For eg: Profit growth, market growth, social responsibility. Policies are broad guidelines for organisational activities.- Financial resources: internal fund generation capacity, borrowing capacity.
- Physical resources: Location of the plant, access to raw material.
- Technological resources: Patents, copyrights, trademarks, and trade secrets.
- Intellectual property.
- Human resources
- Innovation resources
- Reputational resources
3. Organisational structure
It defines job allocation, responsibility and accountability.
4. Organisational culture
It refers to a complex set of ideologies, symbols and core values that are shared throughout the firm. It influences how the firm conducts business.
5. Organisational system
6. Labour unions / Trade unions
7. Shareholders/owners
2) External Environment
The external environment of a business comprises the factors which are external to the firm. It is not normally influenced by business.
Elements of the external environment
The external environment of a business may be further divided into two parts:
i) General / Remote / Macro environment
ii) Operating / Task / Micro / Specific environment
i) General / Remote / Macro environment
The general environment is composed of dimensions in the broader society that influence an industry and firms within it. The different components of the general environment are:
- Economic Environment:
- Political environment
- Socio-cultural environment
- Technological environment
- Legal environment
- Environmental components
- Global environment
ii) Operating / Task / Micro / specific environment
It is composed of the factors that are directly related to the competitive position of a business, as discussed below:
A) Customer:
Customers may be an individual, a family or a business. All business activities are directed towards satisfying customer needs and retaining them effectively.
B) Suppliers
Suppliers are the people or firms who provide inputs to the business needed to produce goods or services. The quality of the product depends upon the quality of the input.
C) Competitors
Competitors are the firms that provide similar products in the same market. Businesses compete with competitors. A businessneedsd tanalyseze the competitors through competitive intelligence, in which a firm gathers data and information to understandcompetitors's objectives, strategies, assumptions, and capabilities.
D) Pressure groups
Environmentalists, consumer advocates and women's groups are pressure groups who exert pressure to the business on price, quality, employment and environmental protection.
E) Financial intermediaries
The supplier supplies their goods to the firm, and the firm sells the goods to customers through distributors and retailer which are financial intermediaries.
F) Government
The regulations and policies of the government exert considerable impact on the operation of businesses.
G) Media
The media largely influence the image of any business. Several opportunities may be created with continuous interaction with the media.
H) Creditors
Creditors provide funds for short as well as long term financial requirements. A sound relationship with the creditors always creates opportunities for a business.
Business system and its environment
The business environment is an integral part of the business system. A business is involved in the transformation of inputs into outputs. Some value is added on input through the conversion process and finally transmitted as output.
A business accumulates the inputs required from the environment. Similarly, it transmits the output to the environment. Hence, a business is a system that has a very close relationship with its environment, as presented below:
Importance of the Business Environment
- It enables the firm to identify opportunities and secure a competitive advantage by being first to enter the market (First mover advantage).
- It enables the firm to detect threats and recognise early warning signals.
- It helps in tapping useful resources, i.e, utilisation of men, material, money, machine, tools, information, etc.
- It assists in coping with rapid changes in the environment.
- It facilitates planning and policy formulation.
- It contributes to performance improvement facilities.
Environmental Analysis
Environmental analysis is a process by which strategists monitor the environment to determine opportunities for and threats to their firm.
Process of environmental analysis
Methods / Techniques / Types of environmental analysis
1. Internal environmental analysis
a. Comparative analysis
It involves comparing different departments, business units or even performance metrics across different time periods ofthe company.
b. Value-chain analysis
Value-chain analysis is a way of looking at all the activities a company performs to create and deliver a product or service.
c. Efficiency analysis
It measures how effectively resources are used by the company to produce output.
d. Effectiveness analysis
It looks at whether something is achieving the desired goals or outcomes. It involves defining clear goals first and making sure the efforts are driving the right outcomes for the business.
e. Cost-benefit analysis
It is a systematic approach to estimate the strengths and weaknesses of different options by comparing the costs and benefits. It helps in decision-making by trying to quantify both sides to see if the benefits outweigh the costs.
2. External environmental analysis
a) PESTLEG analysis:
PESTLEG is the acronym for political, economic, socio-cultural, technological, legal, environmental (physical) and global factors. It involves the analysis of remote or general environmental factors which are uncontrollable to an organisation.
b) Strategic group analysis:
It is the process of conducting research on the business environment within which an organisation operates and on the organisation itself to formulate a strategy. It aims to identify organisations with similar strategic characteristics, following similar strategies or competing on similar bases.
c) Porter's five forces model/Analysis of industry environment:
According to Porter, an industry environment is composed of the five factors that determine an industry's profit potential, which eventually determine the strategic options of firms. The five forces are called Porter's Diamond, which are as follows:
- Threats of new entrants.
- Threats of substitutes buyer.
- Bargaining power ofthe buyer.
- Bargaining power of the supplier.
- competitive rivalry.
e) Scenario planning
It is a picture of a possible future environment. The features of scenario planning include:
- It depict future possibility
- use in environmental volatility
- Involves the election of suitable strategies
- Builds a longer-term view
- Intellectual process (analysis of environmental factors)
- Top management policy (Build continent plan) Scenario planning creates three likely scenarios: favourable, probable and improbable.
Business environment analysis for strategic management
Business environment analysis is an ongoing process of monitoring the business environment (especially the external environment). It helps to understand the opportunities and threats in the business organisation.
Strategic management is a set of managerial decisions and actions that determine the long-run performance of an organisation. The following are the steps of strategic management:
- Strategic Planning (Formulation): It is concerned with the formulation of strategy. It includes the development of vision, mission, objectives and strategy. SWOT analysis serves as the base of strategic planning. Environmental analysis is thus always at the heart of sthe trategic planning process.
- Strategic Implementation: In this process, we adjust/improve/change the strategy as needed based on the environment. The environment is analysed to ensure that existing resources and capabilities can deal with opportunities and threats,
- Strategic Control: We measure and evaluate the performance based on strategic planning and strategy. Organisational performances or activities are monitored to ensure that the direction of strategy implementation is in the right way.
- Feedback: It includes gathering information fromthe environment to improve the process of strategic information. This is the last stage of the strategic management process.
- Multinational company
- Open market policy
- Increase in the private sector
- Growing cities
- Socio-cultural change
- Basic infrastructure
- Use of modern technology
- Service business
- Consumer trend
- Workforce diversity
Case Study:
The shifting winds for Himalayan Brew Pvt Ltd.
Business environment refers to the institutions or forces that affect the business organisation's performance. It is a set of all the conditions and events that are directly or indirectly related to the operation and development of a business. It is the sum of all the internal and external components. It is composed of the events and conditions inside as well as outside of organisations. The components of the business environment are:
- Internal components and
- External components.
Internal components are controllable factors, whereas external components are uncontrollable factors. Internal environment determines the relative strengths and weaknesses of the firm, while the external environment examines opportunities and threats to the firm.
In the given case, a 2010-established small speciality tea producing company, Himalayan Brew Pvt. Ltd's strategic decisions are affected by the following main components of the business environment as follows:
1. Internal components:
a) Organisation’s vision, mission, objectives and strategies
The organisation's vision, mission, objectives and strategies are crucial internal components that shape Himalayan Brew's strategic direction and decision-making. The company is creating strategies that align the decision with the company's long-term vision of steady growth.
b) Organisational culture:
The company emphasises eco-friendly practices and community involvement, which might contribute to a positive company culture.
2) External components:
a) The general external components of the business environment affecting Himalayan Brew Pvt. Ltd are as follows:
i) Economic Environment:
The economic soundness of the GDP growth rate in Nepal faced fluctuations due to political instability and trade disruptions. It increased the cost of raw materials, packaging and logistics, affecting the pricing policy of the company.
ii) Political Environment:
The government action for stricter food regulations and new labelling requirements aligned with international standards demanded additional investment in quality testing and compliance processes. This affected the production of quality tea products in the Himalayan Brew Pvt Ltd, too.
iii) Legal Environment:
The trade agreements opened up new export opportunities of product of company's products.
iv) Socio-cultural Environment:
The increasing interest in health-conscious products among Nepali consumers, younger consumers' preference for ready-to-drink tea and innovative flavours affected the organic tea product. Social media influencers also played an important role in shaping the buying decisions of customers.
v) Technological Environment:
The interaction with customers through e-commerce and mobile payment systems changed how business responds customerers feedback. The company also adopted online marketing campaigns, subscription models, and data-driven customer engagement, speeding towards digital transformation.
vi) Natural Environment:
The company's unique selling point was premium organic tea sourced from mid-hill farmers using eco-friendly farming techniques. As climate change started, unpredictable harvests affected the company. For eco-friendly production, NGOs and international organisations offered projects for sustainable farming.
vii) Globalisation:
The trade agreement with China and Korea, technological transformation, and involvement of NGOs and international organisations for eco-friendly and fair production are globally affecting the strategies of Himalayan Brew Pvt Ltd.
b) The external task environment of Himalayan Brew Pvt Ltd, which includes:
i) Customers:
Health-conscious consumers in Nepal and potentially international markets, changing preferences towards herbal and wellness products, and ready-to-drink tea are customer factors influencing Himalayan Brew's strategic decisions.
ii) Competitors:
Other tea producers in Nepal and international level also affectthe trategic decisions of the company.
iii) Media:
Social media influencers are shaping buying decisions and promoting the products of Himalayan Brew Pvt Ltd.
iv) Government:
Regulatory bodies enforcing food safety regulations and labelling rerequirements government initiatives, and trade agreements impacting export opportunities significantly impacted Himalayan Brew's operations, strategy, and success.
In conclusion, Himalayan Brew's strategic decisions are influenced by various components of the business environment. To make informed decisions and stay competitive, the company's management should thoroughly study these factors ananalyseze them regularly. By doing so, Himalayan Brew can identify opportunities and threats, leverage its strengths and mitigate its weaknesses. Regular analysis of the business environment will enable the company to adapt to changing market conditions, make better strategic decisions, and ultimately achieve long term goal. By staying attuned to the dynamic business environment, Himalayan Brew can navigate challenges and capitalise on opportunities, ensuring sustainable growth and success.
Q no. 2. Using environmental analysis techniques, suggest how Himalayan Brew can systematically assess opportunities and threats in its external environment.
Environmental analysis is the detailed study of the internal and external environment for strategic planning, implementation and control. It is the process of scanning, monitoring, forecasting and assessing the environmental trends. There are two types of environmental analysis:
- Internal environment analysis.
- External environment analysis.
Himalayan Brew can systematically assess the opportunities and threats in its external environment by using the following environmental analysis techniques:
1. PESTLEG analysis:
PESTLEG analysis involves the analysis of remote or general environmental factors. These factors are uncontrollable to an organisation and are analysed to identify the environmental trends and assess possible opportunities and threats.
a) Political: stricter food safety regulations and new trade agreements with countries like China and South Korea
b) Economic: Fluctuating GDP growth rate, inflation and trade disruptions.
c) Social: changing consumer preferences towards herbal and wellness products, ready-to-drink tea, and innovative flavours.
d) Technological: Rise of e-commerce platforms, digital marketing and data-driven customer engagement.
e) Legal: Compliance with food safety regulations and labelling requirements.
f) Environmental: climate change and sustainability.
g) Global: Global market trends, trade agreements, economic conditions and customer preferences.
2) Strategic Group Analysis:
Strategic group analysis identifies companies within the same industry that pursue similar strategies. For Himalayan Brew, this could involve analysing the competitors who:
a) Focus on organic and sustainable tea products.
b) Target similar customer segments (health-conscious customers)
c) Employ similar marketing and distribution strategies.
Q no. 3. If you were part of Himalayan Brew's top management, which strategic direction would you choose and why? Support your decision with references to the case facts.
Himalayan Brew Pvt Ltd should consider the following additional tools and techniques to develop a robust strategic plan:
1) Porter’s Five Forces Analysis
This model helps in analysing the industry’s attractiveness and profitability by examining five key competitive forces:
- Threat of New Entrants: Assessing how easy it is for new tea companies to enter the market, which depends on barriers like economies of scale or brand loyalty.
- Bargaining Power of Suppliers: Evaluating the influence of tea farmers and packaging material providers on the company’s costs.
- Bargaining Power of Buyers: Analysing the ability of customers and distributors to drive down prices or demand higher quality.
- Threat of Substitute Products: Identifying alternative beverages like coffee, juice, or traditional tea that could replace speciality organic tea.
- Intensity of Rivalry: Measuring the level of competition among existing tea producers in Nepal.
2) Competitor Analysis
Himalayan Brew should conduct a deep dive into its rivals to identify their strengths, weaknesses, and market positions. This involves:
- Identifying Competitors: Distinguishing between direct rivals specialityy tea brands) and indirect rivals (supermarkets or coffee shops).
- AAnalysingStrategies: Reviewing their pricing, marketing channels, and product features.
- Benchmarking Performance: Comparing Himalayan Brew’s organic certifications and eco-friendly practices against those of competitors.
3) Scenario Planning
Given the uncertainties in climate change and political stability mentioned in the case, scenario planning allows the company to prepare for multiple future "realities."
- Optimistic Scenario: Predicting high growth if new international trade agreements are signed and organic trends surge.
- Pessimistic Scenario: Preparing for a "worst-case" scenario where climate change severely impacts harvests or new regulations increase costs significantly.
- Realistic Scenario: Planning for steady growth based on current market trends and digital transformation.
4) Strategic Direction and Goal Setting
The company must define its long-term trajectory by integrating its mission of sustainability into specific, measurable actions.
- SMART Objectives: Setting goals that are Specific, Measurable, Achievable, Relevant, and Time-bound (e.g., "Increase export revenue by 20% within two years").
- Resource Allocation: Ensuring that financial and human resources are directed toward high-priority areas like e-commerce and sustainable farming projects.
In conclusion, by using these additional tools—Porter’s Five Forces, Competitor Analysis, and Scenario Planning—Himalayan Brew can transition from a reactive approach to a proactive strategy. These frameworks will provide a 360-degree view of the industry, allowing the company to safeguard its premium position and ensure sustainable growth in a volatile market.
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