top of page

Business Environments

Businesses operate within environments. The relationship of a business with its external environment can be depicted as a subset area of an environment that includes it. The business environment can be classified into two classes, the target environment that is closest to the business and the external environment that is further removed from the business.

Environment All factors that affects the business but cannot be affected back by the business.

External Environment

The internal environment of a business consists of eight components that we have to consider, and which are in turn spread across three architectural layers.

Internal Environment

 Internal
Environment 

The environment where an organisation interacts with its clients, suppliers and competitors.

Target Environment

External Environment

External Environments

A business is subject to a number of factors which inevitably affect it but which cannot be affected back by the business. These factors are grouped together into an environment called the external environment of the business. This is because these factors are outside the scope of effect of the business.


The external business environment is made up of a number of factors that are generally outside the scope of the business’s control. However it could be that a factor is found in the external environment of one organisation but in the target environment of another. The political trends in South Africa were definitely external environment factors for an organisation like Volkswagen South Africa and target environment factors for an organisation like the African National Congress (ANC).

The typical factors for a commercial business can be considered:

  1. Political

  2. Demographics

  3. Legislative

  4. Economic

  5. Cultural

  6. Technology Trends

  7. Geographical

  8. Geological

  9. Industrial

  10. Socio Economical

  11. Directional

 POLITICAL 

The political arena has a huge influence upon the regulation of businesses. Political factors are about how and to what degree a government or related bodies intervenes in the economy, as an example. We need to understand the relationship between governmental strategy or development plans and the organisation.

  • Are there political or government stability risks? The extent to which the political system is stable or poised to undergo significant change.

  • What are the changes in government policy that might affect the business?

  • Are there any national and international political trends, alliances, events and direction that have immediate implications on the organisation in terms of timing of events, product and offering sets, process and market changes as well as suppliers and customers.

  • What tax or other incentives are being developed that might affect strategy development?

  • Whether the political context of the organisation directly involves the legal context: some organisations require specific legal status to operate, to receive external funding, and to import equipment in support of research.

  • The extent of which government and its bureaucracy supports and contributes resources to the organisation. An government inputs anticipated to support increased staffing, maintenance, or other recurring costs?

Examples include:

  • Trade Deregulation - Government tighten import controls.

  • Government consolidates educational system.

  • Government implements a wealth tax to fund education.

  • A wealth tax funds the war against AIDS.

 Demographics 

Specific demographic factors which identify and distinguish a target population or market. It also refers to selected population characteristics. These factors include statistical socio-economic characteristics or variables of a population, such as age, sex, education level, income level, marital status, occupation, religion, birth rate, death rate, geographical spread or concentration, average size of family, average age at marriage, ect. A census is a collection of the demographic factors associated with every member of population.

  • What demographic trends will affect the market size of the industry? (Growth rate, income, population shifts).

  • Have there been changes in the demographics of your market which may increase or reduce demand?

  • What are those specific demographic factors which identify and distinguish a target population or market for our organisation.

Examples Include:

  • Population spread and growth

  • Concentration of skill across geographical areas and across races or nationalities.

Specific demographic factors which identify and distinguish a target population or market. It also refers to selected population characteristics. These factors include statistical socio-economic characteristics or variables of a population, such as age, sex, education level, income level, marital status, occupation, religion, birth rate, death rate, geographical spread or concentration, average size of family, average age at marriage, ect. A census is a collection of the demographic factors associated with every member of population.

  • What demographic trends will affect the market size of the industry? (Growth rate, income, population shifts).

  • Have there been changes in the demographics of your market which may increase or reduce demand?

  • What are those specific demographic factors which identify and distinguish a target population or market for our organisation.

Examples Include:

  • Population spread and growth

  • Concentration of skill across geographical areas and across races or nationalities.

Specific demographic factors which identify and distinguish a target population or market. It also refers to selected population characteristics. These factors include statistical socio-economic characteristics or variables of a population, such as age, sex, education level, income level, marital status, occupation, religion, birth rate, death rate, geographical spread or concentration, average size of family, average age at marriage, ect. A census is a collection of the demographic factors associated with every member of population.

  • What demographic trends will affect the market size of the industry? (Growth rate, income, population shifts).

  • Have there been changes in the demographics of your market which may increase or reduce demand?

  • What are those specific demographic factors which identify and distinguish a target population or market for our organisation.

Examples Include:

  • Population spread and growth

  • Concentration of skill across geographical areas and across races or nationalities.

Specific demographic factors which identify and distinguish a target population or market. It also refers to selected population characteristics. These factors include statistical socio-economic characteristics or variables of a population, such as age, sex, education level, income level, marital status, occupation, religion, birth rate, death rate, geographical spread or concentration, average size of family, average age at marriage, ect. A census is a collection of the demographic factors associated with every member of population.

  • What demographic trends will affect the market size of the industry? (Growth rate, income, population shifts).

  • Have there been changes in the demographics of your market which may increase or reduce demand?

  • What are those specific demographic factors which identify and distinguish a target population or market for our organisation.

Examples Include:

  • Population spread and growth

  • Concentration of skill across geographical areas and across races or nationalities.

 Legislative, Regulative & Compliance 

The way in which legislation in society affects the business. It includes any law, Act, Governance Framework, ect. Factors relating to legislation. The rules and regulations created by the legal system framework on which the organisation runs.

  • What are the rules of the game that are likely to govern our strategy under all scenarios?

  • What changes in regulation are possible? What will their impact be on our industry?

  • What are the constitutional restrictions on the organisation?

  • What are the specific regulations that govern the goals and structures of the organisation?

  • Is there a legislative mandate that restricts leadership of the organisation?

Examples Include:

  • Changes in employment laws on working hours.

  • Taxation on luxury items.

  • Carbon taxes are imposed and enforced providing the economic incentive to reduce energy intensity, or alternative sources of energy.

  • Competition law.

  • Environmental issues and greener products are legitimately used as non-tariff barriers.

  • Importation (Custom regulations)

Political
Demographics
Legislative

 Natural Resources 

Identifying factors concerned with the sustainable an innovative use of, or influence on natural resources, as well as the consequences of our resource use in terms of impacts on the environment.

  • Community Value Shift - values are increasingly driven by environmental awareness.

  • Severe changes in weather patterns - worldwide recognition of "one globe, one life".

  • Tightening sulphur specifications.

  • Trading in carbon credits implemented.

  • Gas to liquid growth in environmental niche markets.

  • Environmental issues and greener products are legitimately used as non-tariff barriers.

  • Drives towards energy efficient, environmentally friendly products.

Natual Resources

 Economical Trends 

How the economy affects a business in terms of trade, taxation, government spending, general demand, interest rates, exchange rates and global economic factors. What economic trends might have an impact on business activity? The following are all examples of economic influences that impact organisations severely:

  • Interest Rates

  • Inflation

  • Unemployment Levels

  • Energy Availability

  • Disposal Income

  • Tax Structures

  • Rand to Dollar Exchange rates

  • Recession

Examples Include:

  • The international economical slump

Economical Trends

 Cultural 

Factors identifying the diversity of cultures, religions, ethics, etc. Differences in cultural focuses amongst workforce, customer base, supplier base an competitors imply products, processes, business protocol, policies, process and data affected.

  • What is regarded as morally right or wrong for a business to do? For instance should it trade with countries which have a poor record on human rights?

  • Tribal chiefs are being used to act as mechanisms to employ labourers.

  • The Pacific Rim countries generally work differently and more productively than the average African country.

  • Work ethics are different between East and West.

 Technology Trends 

The development of technology has significant impact on processes, customers, value chains and business strategies. Both the types and the level of technology in the society give insight into understanding an organisation. It is important to understand the level of relevant technology in the organisational context.

  • To what extent are existing technologies maturing?

  • What technological developments or trends are affecting or could affect our industry.

  • How does the rapid pace of change in production processes and product innovation affect our business?

Examples Include:

  • New catalyst and polymer processes allow additional product functionality.

  • Within 5 years most business-to-business transactions are conducted via the Internet.

  • Within a decade the Internet has pervaded education and entertainment.

  • A market develops for Hybrid Technology Vehicles.

  • Maturity and utilization of hand-held devices.

 Geographical 

The Geographical location of raw material, globalisation and geographical spread of customers, markets and product requirements affect strategies, processes, products, pricing, technology, protocols and policies in order to accommodate and capitalise on this influence.

  • Availability of networking and communication infrastructure.

  • Geographical concentration of resources (oil).

  • Gauteng representing the majority of the South African economy.

Examples Include:

  • The development of a new set of industries, coal mining, coal energy production as well as petrochemical plants in Northern Limpopo Province.

Cultural
Technology Trends
Geographical

 Geological 

Pollution is recognized more as a global threat and a society that is much more aligned with conservation is pressurizing industry segments to align their offerings and policies to support this.

 Industrial 

The manufacturing, trade and engineering aspects relating to the industry the business operates within; the size of the industry, its relative complexities, industrial directions, segmentation of industries and its relative positioning.

  • Alternative Energy Sources - breakthrough on safe and smaller nuclear reactors as well as electric vehicles.

  • The basket of petrochemical and energy commodities does not change.

  • Conventional petroleum dominates the transport sector.

  • Emphasis is on survival and domestic economic priorities rather than the environment.

  • It is a decade of consolidation, with little prospect of new market and product potential.

  • SA business increasingly involved with the government in distance learning and training.

  • Cost effective solar energy distributed via room temperature super-conducted cables.

Examples Include:

  • The emergence and increased dependency on independent power producers in South Africa.

Geological
Industrial

 Socio-Economical 

Socio-economical factors are the combination of social and economic conditions that influence the operation and performance of an organisation. What are thhe social (human) factors influencing the economy? This is how consumers, households and communities behave, as well as their beliefs and value sets. There are a number of issues that are important or that could provide valuable information in terms of socio-economical. What are the current or emerging trends in lifestyle, fashion, etc?

  • Reduced funding for education results in declining standards.

  • Education starts to improve. More funds for education due to wealth tax that is implemented.

  • As crime declines and job oppurtunities increase, the brain drain reverses and SA also benefits from the influx of skills from Africa.

  • The employment effect from HIV/Aids. Aids has a devastating effect on the SA population.

  • High unemployment rates.

Examples Include:

  • The one-time opinion of the South African government that a definite cure for AIDS is the consumption of Africa potato, beetroot and garlic.

  • The fact that official figure for HIV and Aids is being manipulated by government through what causes of death are declared.

 Directional 

Directional factors identify the industry's direction for the future and will influence the operation and performance of the business.

  • What are significant industry trends and future events?

  • What is the future path to follow or direction that the industry segments are being forced or channelled into?

  • What are the key areas of uncertainty as to trends or events that have the potential to impact strategy?

  • What will the look and feel of the future business be? 

Examples Include:

  • The move to alternative sources of energy. Green drive.

  • Independent energy producers emerging.

  • Electric vehicles replace Hybrid Technology Vehicles.

  • New process technology leads to smaller plants.

Socio - Economical
Directional

Target Environment

Target Environment

Any organisation is positioned within an environment where it is associated with suppliers. Typically we could expect to find it surrounded by a number of competitors. In this context, even not-for-profit organisations have competitors for limited funds.


This environment, where an organisation meets its suppliers and competitors and perhaps some other stakeholders, to engage in a match called business, is the playing field for these competitors. Every party that can participate in this match, in a manner such that it can be directly affected by the result, qualifies as a participant in the target environment.


Target environmental categories can influence or initiate changes in an organisation but can
also be affected by an organisation.

Five players typically occupy the target environment:

  1. Stakeholders

  2. Market Factors

  3. Customer (Delivery / Distribution)

  4. Supplier (Sourcing)

  5. Competitor Factors

Stakeholders & Market Factors
Image by timothy muza

This is the set of parties, apart from the customers and suppliers, which are going to be affected by everything that impacts the business. Unions are definitely stakeholders, so are all shareholders and employees.

 STAKEHOLDERS 

Image by Peter Hershey

Markets are made up of the current and potential customer base. Markets dictate offering trends, prices policies, protocols and strategies.

 MARKET FACTORS 

Image by Casey Schackow
Image by rupixen
Customer & Supplier

Who our customers are, how they are associated with us, where they are and what we can do to accommodate them better will impact our processes and strategies etc.

 CUSTOMERS 

We need an understanding of all the current and potential suppliers. Their direction and stability affect us directly. We need to influence their structure to be better aligned with the other components of the value chain.

 SUPPLIER 

Competitor Factors
Image by Hermes Rivera

Who they are and what they look like, how we can build walls in their path and what we could do to strategically differentiate us from them will imply severe changes.

 COMPETITOR FACTORS 

Internal Environment

Internal Environment

Panels on the Pyramid Model

Facets

The internal environment of a business consists of eight components that we have to consider, and which are in turn spread across three architectural layers. There are factors from each architectural layer that we have to consider within each component of a system.


Each architecture layer consists of, or is described by eight architectural facets:

  1. Strategy

  2. Object

  3. Time

  4. Locality

  5. Organisation

  6. Function

  7. Data

  8. System Operation, which represents the integration of the first seven architectural facets

A Business Process is some activity that a business must perform to meet the needs of its customers.

Processes

A statement that reflects how the firm plans to use all its resources and functions to gain competitive advantage.

Mission

A business is made up of a number of processes that are performed to achieve a particular mission. An organisation structure is defined into processes for which people are employed because of their skills. These people are associated with the processes, to enable the processes to execute and to control the execution. The application of this work force in terms of these processes necessitates reporting structures to control the people’s relationships with one another.

To enable the processes information is required by certain equipment and people within the organisation. Information about the processes is needed for control, for execution and quality.

The processes are structured and related to one another in a specific way, they are also executed in a specific manner. A timing component applies to the activities of people or mechanised or computerised processes. Timing is reflected in terms of the sequence of execution of these components, in terms of which ones can and which ones should be executed at the same time, as well as the duration of execution.

In addition to all of this, the geographical dimensions of the business impact the business processes. Some processes will need to be replicated at the different localities. Some infrastructures could also be replicated at certain localities. To complete the picture it might be necessary to centralise certain processes and infrastructures at one locality.


All of the above factors together represent the strategy of the business at a specific point in time.

bottom of page