CHAPTER TWO
BUSINESS AND ITS ENVIRONMENT
The main purpose of a business is to make profits. To achieve this, a business needs to:
- Satisfy customer needs
- Reduce operating costs
- Strive to survive by competing favorably
Types of business activities
- Extraction – obtaining goods from their natural setting, e.g., mining, farming, lumbering.
- Processing of raw materials – changing the form of goods without combining them with other goods.
- Manufacturing – combining different raw materials to create one final product, e.g., a table made of wood, glue, nails, and varnish.
- Construction – building rails, roads, and buildings.
- Distribution of goods – spreading goods from manufacturers to users, done by distributors.
- Trade – buying and selling goods with the aim of making profits, done by traders.
- Provision of services – selling services to consumers, e.g., hairstylists, car washers.
Business environments and their effects
Internal and external
Internal environment
- May be strengths or weaknesses of the business, e.g., skilled manpower.
- Also called the micro environment.
They include:
- Business structure
This is the formal arrangement of activities carried out at various levels of the organization. A well-laid business structure leads to success because:
- Each employee knows what is expected
- There is no conflict or confusion
- Teamwork is enhanced
- Proper control promotes efficiency
- Resources
A resource is something that can be used to achieve an objective. The following are some resources of a business:
- Human resource
Employees in a business provide human resources. A business with qualified human resources is more likely to succeed.
- Financial resources
A business with adequate finances is more likely to perform better than one lacking such resources.
- Physical resources
These are tangible facilities belonging to a business, e.g., buildings, machinery, furniture, and stock.
- Technology
These are the skills and methods used in production. A business with relevant technology is more likely to succeed.
- Business culture
Business culture arises from the combination of employees’ expectations, beliefs, and values within the business. A culture of involving employees in decision-making tends to perform better.
- Owner
The owner provides finances and makes decisions concerning the operations of the business.
External Business Environment
- Also called the macro environment – large in scale
They include:
- Economic environment
These are factors that affect buyers’ ability to purchase goods and services offered by a business, e.g., charges, taxes, rates.
- Demographic environment
- Includes factors in population change – size, distribution, age, density, birth and death rates.
- A growing population provides a market for goods and services.
- Age and sex distribution shape the line of business, while better education and jobs for consumers improve their taste and demand for quality goods and services.
- Legal – political environment
The government closely monitors and passes laws and policies to regulate activities. Traders may choose to invest in some areas because of lower or no taxes.
Manufacturers of foodstuffs are required to include expiry dates on their goods. Political stability also creates a conducive business environment.
- Technological environment
Technology refers to the level of know-how, efficient use of tools, equipment, and other resources. Advancement in technology leads to better quality goods being produced.
- Cultural environment
Culture is the norms that regulate the behavior of people in society. It includes customs, beliefs, and values. Culture dictates how people live and the products they consume, e.g., Muslims and pork.
- Competitive environment
Firms try to outdo each other in their efforts to maximize profits. Competition can be generic or enterprise.
Generic competition refers to competition where products are used for the same purpose though the products differ, e.g., cinemas and discos are competing forms of entertainment.
Enterprise competition occurs where products are similar to those of another firm, e.g., a local shoe manufacturer competing with imported shoes.
- Physical environment
Includes factors such as climate and infrastructure, e.g., roads, water supply, electricity, banks.
