Regardless of whether they are public or private, large or small, all business enterprises must consider elements that comprise their environment. Business enterprises secure inputs (people, material, information, money) from their surrounding environment and in turn produce goods and services that they send to the same environment. A business’ performance is often dependent on how well the enterprise influences and is influenced its environment. A business is affected both internal and external environment factors that entrepreneurs must understand. The internal environment is often referred as the industry environment and consists of employees, shareholders, competitors, customers, suppliers, financial institutions, labor unions, etc.
Internal environment consist of forces that affect business directly and include competition, employees, financial institutions, suppliers, shareholders etc.
1. Competitors: market competition is the cornerstone of managerial capitalism. Businesses that do not compete effectively are often confronted with the uncomfortable prospect of either changing or being eliminated. Kenyans telephone users are benefiting greatly from competition of Safaricom, Airtel, Orange/Telkom and the newly introduced Yu. There are five forces that shape the degree of market competition operating within an enterprise environment (as given Michael Porter) these include:
- Rivalry among the existing enterprises: This is jockeying for position among the enterprises competing in a particular market. The key issues here are the number of competitors, their competitiveness and the nature of market exit barriers. Competition helps to improve a firm’s position, acts as a motivator and often helps to reduce cost. If the rivalry is high then the degree of competition is also said to be high. E.g. in tooth paste industry.
- Relative power of customers: the major issue here is whether the customers can exert influence forcing down the prices, bargain for moe services and higher quality or play enterprises off against one another. Customer is said to be powerful if the business is selling to only one customer here the customer can influence the price down and the degree of competition is said to be high.
- Relative power of suppliers: can the suppliers exert influences threatening to raise price or reducing the quality? When one supplier is supplying the business then he can have great power and the degree of competition is high unlike where are many suppliers to choose.
- Threat of new entrants: new enterprises in a market place generally increase product supply, seek to gain market share and often possess substantial resources. They are likely to force market prices down which will have negative impact on firms. If the barriers to entry are low then the threat of new entrants is high and so is the degree of competition.
- Threat of substitutes: substitutes that are of equal quality offered at a lower price can have a devastating effect on sales and thus in increased competition. Substitutes can make an enterprise product obsolete. Where there is great number of substitute’s then the degree of competition is high.
2. Customers: all enterprises rely on customers for existence. Consumer groups are becoming an important force in the business. A customer could be an individual, an institution, a government or another firm. The manager must understand his customers and find ways of maintaining customer relationships.
Suppliers: organizations are dependent upon suppliers of materials and labor and will try to take advantage of competition among suppliers to obtain lower prices, better-quality work and faster deliveries. Many organizations will try to reduce suppliers to reduce costs. A favorable supplier relationship leads to better shipping arrangements, early warning of major changes and advanced information about technological or marketing developments.
3. Financial institutions: An enterprise depends on a variety of financial institutions such as commercial banks, investment banks, insurance firms etc for supply of long-term and short-term loans. Because effective working relationships with financial institutions are so vital, establishing and maintaining these relations is the work of finance officer and CEO of the organization. Some organizations incorporate a banker in their board od directors to enhance the relationship.
4. Employees: all enterprises their objectives through the action of their employees. For their part, employees work to meet their own personal, social and economic needs. Management has to design and influence leadership in a way that employees view their contributions as supportive and consistent with their sense of personal importance. The challenge is to create a situation in which both employer and employee achieve their goals. Management must maintain sound relationships with the unions for effective running of their organizations.
5. Owner/shareholder: they are technically the owners of organizations through stock ownership. Some shareholders have ability to influence the running of their organization. They exercise their powers through voting in general meeting, special general meetings or even in selling their shares. Task environment responds to organization through networks & coalitions and multiples roles while management tries to keep the relationship between stakeholders and organization.
Business operate in an external environment where they not only need to be concerned with competition from rivals business but also take into account the legal, political, social and economic influences, commonly referred to as SLEPT factors. Business planners often carry out an analysis of these factors, which enables them to develop more informed strategies (long-term goals).
1. Social factors: these relates to changes in society and demographics structures to which the business is exposed. Demographics are the characteristics of the population such as average age, birth rate, level of education. A consumer preference changes over time given changes in the environment. The advancement in technology has seen so many changes in consumer preferences. Kenyans are no longer buying cassette tapes with the advent of CDs, DVDs, and USBss. (Madura 2007)
2. Legal factors: these relates to changes in laws and regulations. Business must be careful to keep the law and anticipate ways in which change in laws will affect the way they do business e.gtobacco bill, media bill.
3. Political factors: these relate to ways in which changes in government and government policies can influence business. In a country where there is political turmoil business is threatened too, since stability is necessary for every business operations. Business may influence the government actions through lobgroups and/illegal actions as well as in some countries to fund their preferred candidate or party to form the next government.
4. Economic factors: this relates to changes in the wider economy. Country’s economy goes through; decline, recession and recovery. A growing economy provides greater opportunities for business to make profits, like banks, and cement industry in Kenya a few years after NARC to power. (Kibera, 1998)
5. Technological factors: change in technology can have positive or devastating effects on business. Managers need to be aware of the changes in technology that is taking place in the environment so as to update themselves and their organization. Technological changes provide opportunities for business to adopt new breakthroughs, innovations and inventions to cut costs and develop new products.
Other factors include: pressure groups such as environmentalists, special interest groups.
The Role of Government in Business
Government is the center of political authority having the power to govern the people it serves. It maintains and regulates orderly relationship among its citizens. The roles of the government in business include:
As a regulator: Government regulates business through policies and legislations that are enforced its agencies. There is need to regulate business in order to conserve and protect environment, unfair practices or harmful products that may harm the public. Also it is the government that is concerned with registering copyrights, trademarks and patents to protect business from other business or unscrupulous individuals. Government is also responsible for maintenance of sound monetary system necessary for conducting transactions.
Tax-gatherer: Government collects billions of shillings each year from its citizens and business fraternity to funds its programmes. Tax and subsidies can be used to discourage or encourage business establishment in a country.
As owners: There some companies that are owned the government, in most cases they hails from the sectors that need heavy investment or don’t attract private investor but are necessary to the public. These are called parastatals. The business ownership the government is diminishing through a process that is called privatization that was initiated donors via structural adjustment programmes.
As provider: The converse of tax-gatherer is that government provides goods and services and to the public and provides infrastructure to the business community to enhance business environment this includes roads, power, security etc.
Business does not operate in a vacuum; there are various components that interact with the business. There is the internal environment, which the immediate stakeholders of the business such as the customers, employees, and suppliers among others. On the hand there is the external forces which the businesses are exposed to include; social-cultural, legal, political, economic, ecological, technological and the global happening. Other than the external forces, government does play a role in business. Essentially government is supposed to be a referee to the business fraternity. It is supposed to provide enabling climate for the business to operate. Different states government do undertake different deliberate measures to encourage investors either from within their countries or from without. Some of the way that government does this is provision of incentives such as few requirements before one start a business, tax relief, capital reimbursement, guarantees, foreign market exhibition among others.