Class 12 Business Environment

What the business environment is, its features and importance, specific and general forces, and its economic, social, technological and legal dimensions.

Key ideas

The business environment is the total of all individuals, institutions and forces outside a business that may affect its performance.

Specific forces (customers, suppliers, competitors, investors) affect a firm directly; general forces (economic, social, technological, legal) affect all firms indirectly.

Its features: totality of external forces, specific and general forces, inter-relatedness, dynamic nature, uncertainty, complexity and relativity.

Relativity means one change affects firms differently: dearer tea helps tea growers but hurts tea-stall owners.

Watching the environment helps a firm spot opportunities (first mover advantage) and threats (early warning signals), tap resources, cope with change, plan, and perform better.

Economic: interest rates, inflation, incomes; social: customs, values, lifestyles; technological: new methods and inventions; legal: laws, rules and court orders.

Remember

First mover advantage

the gain from being the first to use an opportunity

Early warning signal

an early sign of a threat, so the firm can act in time

Economic change

e.g. banks raise their interest rates on loans

Social change

e.g. people grow health-conscious and want organic food

Technological change

e.g. digital payments replace cash; electric scooters cut demand for petrol ones

Legal change

e.g. a law requires the expiry date on every food packet

Dynamic vs uncertain

dynamic: it keeps changing; uncertain: the changes are hard to predict

Watch out

Calling customers and competitors general forces: they act on the firm directly, so they are specific.

Mixing up dynamic nature (constant change) with uncertainty (changes that are hard to predict).

Putting a new labelling law in the social environment: laws and court orders are the legal environment.

Worked example

How might each change affect a business? Name its dimension. (a) Banks raise their rates of interest on loans. (b) Electric scooters reduce demand for petrol scooters.

Working: economic: interest, prices, incomes; social: values and lifestyles; technological: new methods and inventions; legal: laws and court orders

Answer: (a) economic: it changes costs, demand or the cost of borrowing (b) technological: it brings new products and methods and makes old ones obsolete