CHAPTER 1: What Is the Business Environment?

CHAPTER 1: What is the Business Environment?

Key Revision Points

Systems and Environments

An environment can be defined as everything which surrounds a system.

Business organisations exist to turn inputs from their environment (e.g. materials, labour and capital) into goods and services which customers in the environment seek to purchase. This transformation process adds value to the inputs. This is the basis of a simple model of the organisation in its environment.

There are three important elements of the business environment:

·  The micro-environment

·  The macro-environment

·  The internal environment

There is evidence that successful organisations are not so much those that deliver value to customers today, but those that understand how definitions of value are likely to change in the future.

Of course, it is much more difficult to predict the future than to describe the past.

Successful companies have often been those who understand their business environment and have invested in growth areas, while cutting back in areas which are most likely to go into decline.

The Microenvironment

The microenvironment of an organization comprises all those other organizations and individuals who directly or indirectly affect the activities of the organization. The following key groups can be identified:

1.  Customers

2.  Suppliers

3.  Intermediaries

4.  Other stakeholders

Relationships between members of an organization's microenvironment

A firm's microenvironment is distinguished from its macroenvironment by being comprised of actual individuals and organizations with whom the firm does business, or at least may potentially do business. This is sometimes described as the "environmental set" of an organisation.

The relationship between set members is likely to be complex and constantly changing. Change can take a number of forms, including:

·  Shifts in the balance of power between members of the environment

·  The emergence of new groups of potential customers

·  Fringe pressure groups may come to represent mainstream opinions, in response to changes in social attitudes.

The MacroEnvironment

The macroenvironment comprises general trends and forces that may not immediately affect the relationships that a company has with its customers, suppliers and intermediaries, but, sooner or later, macroenvironmental change will alter the nature of these relationships.

Most analyses of the macroenvironment divide the environment into a number of areas. The principle headings, which form the basis for chapters of the text, are described below. It must, however, be remembered that the division of the macroenvironment into subject areas does not result in watertight compartments.

·  The economic environment

·  The political environment

·  The social and cultural environment

·  The demographic environment

·  The technological environment

·  The information environment

Value chains

The purpose of organizations is to transform inputs bought from suppliers into outputs sold to customers. In carrying out such a transformation, organizations add value to resources.

Backward vertical integration occurs where a manufacturer buys back into its suppliers. Forward vertical integration occurs where it buys into its outlets. Many firms expand in both directions.

It is important that an organisation looks not only outwardly at the value chain, but also inwardly at its own service profit chain.

Intermediaries and channels of distribution

Intermediaries perform a number of functions:

·  They assist in the process of value creation.

·  They make products locally available to consumers.

·  They break down volumes.

·  Intermediaries assist in the task of transferring ownership of goods and services.

·  Intermediaries provide valuable sales support at a local level.

·  An intermediary can provide valuable insights into a proposed market.

·  Sometimes intermediaries provide goods and services.

·  Customers often prefer to but goods and services from intermediaries who offer a choice of competing products.

·  Goods and services often require after-sales support.

·  Intermediaries often share part of the risk.

Channel design is constantly adapting to changes in the business environment.

Push and pull channels of distribution

The relative power of organisations in a channel of distribution has been changing.

Developments in channel structures

Movement towards integrating the different stages of a channel of distribution has occurred in a number of ways. In its most simple form, integration can occur through agreement over operational matters - standardization of pallet sizes and packaging methods to suit the needs of manufacturer, wholesaler and retailer is one example. Bar coding of products allows companies to handle goods more efficiently.

The Internet Environment

The Internet has emerged as a versatile tool in an organisation's relationship with its business environment, combining a communication function with a distribution function.

Despite the enormous potential of the Internet to simplify communication between a company and its customers without recourse to intermediaries, problems of final delivery remain where tangible goods are involved.

Buyer-seller Relationships

Members of an organization's business environment are often being brought closer together to act co-operatively rather than in confrontation with each other.

Recent resurgence of interest in close buyer-seller relationships has occurred for a number of reasons:

·  In increasingly competitive markets, good products alone are insufficient to differentiate an organization's products from that of its competitors.

·  Developments in information technology have had dramatic effects in developing close buyer-seller relationships.

·  Just-in-time production methods (JIT) have become very widespread in Western countries, thanks to the lead given by Japanese manufacturing companies. JIT systems demand a lot of co-operation between supplier and customer.

·  In recent years, women have become much more important in the business environment, both as buyers and sellers.

The Internal environment

Internally, the structure and politics of an organization affect the manner in which the organisation responds to environmental change.

Within many organisations, it has proved difficult to change cultural attitudes when the nature of an organisation's business environment has significantly changed, leaving the established culture a liability in terms of managing change.

Many of the most successful commercial organisations, including the Virgin Group, Federal Express and McDonalds have attributed their success in part to the quality of leadership within their organisations.