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THE BUSINESS ENVIRONMENT

A business environment refers to the forces that influence the operations and growth of
organizations. These forces could be internal, for example, HR policies and customers' expectations,
or external, for instance, government regulations and technological innovations.

Explain the importance of entrepreneurial activities in the economy.

● Provision of goods/services - They provide goods and services which people wish to buy.
● Employment creation - They help in job creations which help people to earn income and
improve their standard of living.
● Contributing to national income- They pay tax to the government which increases the country’s
income hence used to finance essential public services.
● Earn Foreign currency - By producing goods for export, businesses earn foreign currency that the
country can spend on imports.
● Increases Gross domestic Product -Entrepreneurship contribute to increasing economic growth
and prosperity by increasing Gross Domestic Product (GDP)
● Brings competition - competition can lead to an increase in the number of choices of
goods/services available to consumers and can result in better quality products and services
being offered at lower prices.
● Infrastructural Development – Entrepreneurial ventures open up infrastructural development in
their localities. Starting up businesses often leads to the development of transport and
communication networks, driven by the need for infrastructure created by these businesses.

Factors contributing to the success:

● availability of finance
● skilled manpower
● provision of quality products
● good customer service/ responsiveness to customer needs, - Providing excellent customer
service can help build customer loyalty and drive business growth.
● availability of technology,
● advertising

Factors contributing to failure:

● Shortage of finance
● lack of business knowledge
● low quality products
● small market
● crime rate
● Shortage of land
● cultural dynamics
● corruption

Indicators of business success

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● Profit - the company's financial gain after deducting expenses. A higher profit margin means that
the company has more money to cover its purchases and daily operations, which reflects an
overall healthy financial condition.

● Growing market base/share - market share is a key indicator of a company's competitiveness.

When a company increases its market share, this can improve its profitability. This is because as
companies increase in size, they can also scale, offering lower prices and limiting their
competitors' growth.

● Employee satisfaction - Employee satisfaction is an essential component of a company’s overall

success. Happy and engaged employees are more likely to feel motivated and committed to their
roles, resulting in higher productivity and better work quality. To maintain high employee
satisfaction levels, companies need to address issues related to compensation, benefits, work-
life balance, and flexibilities at work.

● Customer satisfaction - By taking the time to measure customer satisfaction, business leaders
can ensure their customers are happy and loyal, leading to greater customer retention,
increased profits, and a better overall business experience.

Factors in the internal business environment

● Human resource
Employees are a major part of your company's internal environment.
-Your employees must be good at their jobs, whether it's writing code or selling products to
strangers.
-Managers must be good at handling lower-level employees and overseeing other parts of the
internal environment. Even if everyone's capable and talented, internal politics and conflicts can
wreck a good company.

● Finance
-Even in a great economy, lack of money can determine whether your company survives or dies.
-When your cash resources are too limited, it affects the number of people you can hire, the quality
of your equipment, and the amount of advertising you can buy.
-If you have enough cash, you have a lot more flexibility to grow and expand your business or endure
an economic downturn.

● Technology
-Technology has a major impact on modern businesses, both positive and negative.
-The positive effects include improved efficiency, enhanced communication, global reach, customer
experience, and collaboration.
-However, companies must also be aware of the negative impacts, including job displacement,
increased competition, security risks, cost, and over-reliance on technology.

● Management Style
Management style refers to how leaders interact with their teams and make decisions. Different
styles, such as autocratic, democratic, or laissez-faire, have distinct impacts on employee motivation
and satisfaction.

Factors in the external business environment – (PESTEL)

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(https://thestrategystory.com/blog/pestel-analysis-framework-explained-with-examples/)
1. Political factors:

Political factors in a PESTEL analysis refer to the impact of government policies, regulations, and
political dynamics on an organization or industry.

● Political stability: The stability of a government can have a significant impact on the business
environment. A stable political climate can promote economic growth and investment, while
political instability or uncertainty can result in economic downturns and create business
challenges.

● Trade policies and regulations: Government policies related to international trade, such as
import/export restrictions, tariffs, and quotas, can impact businesses that rely on global supply
chains or serve international markets. These policies can influence the cost of goods,
competitiveness, and market access.

● Political relations between countries: poor relationship between countries can impact
international trade and investment eg a trade war between two countries may disrupt supply
chains or reduce market access for businesses operating in those countries.

2. Economic factors:

When the economy goes down, consumers spend less during inflation, the demand and supply of
goods and services also decrease. On the other hand, during economic prosperity, consumers spend
more, resulting in increased business expansion opportunities.

Economical factors include:

● Tax policies: Changes in tax policies, such as corporate tax rates, value-added taxes, or tax
incentives, can affect the profitability of organizations and influence their investment decisions.
High tax leaves firms with less profit while lower tax/no tax help them to be left with
more/enough profit.

● Economic growth: The overall growth of the economy, measured by indicators such as GDP, can
impact the demand for products and services. A growing economy generally leads to increased
consumer spending, while an economic downturn may result in reduced demand.

● Interest rates: Central banks set interest rates, which influence the cost of borrowing for
consumers and businesses. Higher interest rates can lead to reduced consumer spending and
business investment, while lower interest rates may stimulate economic activity.

● Inflation: Inflation represents the rate at which prices for goods and services increase over time.
High inflation can erode purchasing power and negatively impact consumer spending, while low
or stable inflation may encourage spending and investment.

● Exchange rates: Fluctuations in currency exchange rates can impact businesses that operate in
international markets or rely on global supply chains. Changes in exchange rates can affect the
cost of imported goods, competitiveness in export markets, and overall profitability.
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● Unemployment levels: The unemployment rate can influence consumer confidence, spending
habits, and the availability of skilled labour for businesses. High unemployment may result in
lower consumer spending, while low unemployment can lead to increased demand for products
and services and potential wage inflation.

3. Sociocultural factors:
Businesses must be compatible with cultural shifts, including changing demographics, lifestyle
preferences, and social attitudes. Failure to understand and adapt to socio-cultural dynamics can
lead to product being outdated and declining market relevance.

● Cultural values and beliefs: A society’s values, beliefs, and traditions can influence consumer
preferences and attitudes toward products and services. For example, a culture that values
environmental sustainability might drive demand for eco-friendly products, while a culture that
prioritizes convenience may favour fast food and delivery services.

● Lifestyle trends: Changes in lifestyle trends can impact the types of products and services that
consumers demand. For example, the rise of health and wellness trends may lead to increased
demand for organic food and fitness products, while the growth of remote work and
telecommuting can drive demand for home office equipment and software.

● Education levels: The level of education in a population can impact consumer preferences and
the types of products and services in demand. Higher education levels may result in consumers
seeking high-quality, sophisticated products and services.

● Media and social networks: The influence of media and social networks can shape public
opinion, consumer preferences, and market trends. Social media platforms, for example, can
amplify trends, facilitate the spread of information, and influence consumer behaviour.

4. Technological factors:

Technological factors in a PESTEL analysis refer to the impact of technological advancements,

innovations, and trends on an organization or industry.

• Technological advancements: The development of new technologies can lead to new products,
services, or more efficient production methods. Companies must stay up-to-date with the latest
technological advancements to remain competitive and capitalize on new opportunities.

● Automation: The increasing use of automation can improve efficiency, reduced labour costs, and
the ability to perform complex tasks. However, automation can also disrupt industries by causing
unemployment.

● Digital transformation: The adoption of digital technologies, such as cloud computing, big data
analytics, and the Internet of Things (IoT), can enable businesses to improve their processes,
customer experiences, and decision-making. Companies that successfully embrace digital
transformation can gain a competitive edge over those that do not.

● E-commerce and online platforms: The growth of e-commerce and online platforms has
changed how businesses interact with customers and conduct transactions. Companies need to
adapt to the changing landscape by offering online sales channels, optimizing their websites for
mobile devices, and leveraging social media for marketing and customer engagement.
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● Communication technologies: Advancements in communication technologies, can impact how

businesses communicate with customers, suppliers, and employees. These technologies can
enable faster and more efficient communication, collaboration, and remote work.

5. Environmental factors:
Climate change and global warming are becoming major causes of environmental concern. With
rising awareness, companies are required to exhibit a certain degree of responsibility towards the
environment. When they fail to do so, the public realizes it, and the enterprise faces losses.

Some examples of environmental aspects include:

● Climate change: The impacts of climate change, such as rising temperatures, more frequent and
severe weather events, can affect various industries, from agriculture and tourism to
infrastructure and insurance. Companies need to assess the risks associated with climate
change, develop strategies to reduce those risks, and adapt to new environmental conditions.

● Resource scarcity: The availability and cost of natural resources, such as water, raw materials,
and energy, can impact businesses that rely on these resources for their operations. Resource
scarcity can lead to increased costs, supply chain disruptions, and the need to find alternative
materials or more efficient production methods.

● Pollution and waste management: Companies must comply with environmental regulations
related to pollution control and waste management, which can affect their operational costs and
public reputation. Businesses investing in environmentally friendly practices and technologies
can reduce costs, minimize regulatory risks, and enhance their brand image.

● Environmental regulations and policies: Governments may introduce or modify environmental

regulations, such as emissions standards, energy efficiency requirements, and conservation
policies. These changes can create opportunities or challenges for businesses, depending on
their ability to adapt and comply with new regulations.

6. Legal factors:
Acceptance of regulations is crucial for avoiding legal liabilities and maintaining the trust of
stakeholders.
Some examples of legal aspects include:

● Employment and labour laws: Regulations governing labour and employment, such as minimum
wage requirements, working conditions, worker rights, and anti-discrimination laws, can impact
an organization’s workforce management and operational costs. Companies must ensure
compliance with these laws to avoid legal penalties, maintain employee satisfaction, and protect
their reputation.

● Health and safety regulations: Businesses must adhere to health and safety regulations to
ensure the well-being of their employees, customers, and the general public. These regulations
can cover aspects such as workplace safety, product safety, and food hygiene. Non-compliance
can lead to legal penalties, reputational damage, and potential harm to stakeholders.
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● Intellectual property (IP) laws: IP laws, such as patents, trademarks, copyrights, and trade
secrets, protect the rights of creators and innovators. Companies need to be aware of these laws
to protect their IP and avoid violating the rights of others. Failure to comply with IP laws can
result in legal disputes, financial penalties, and loss of competitive advantage.

● Consumer protection laws: Regulations that protect consumers from unfair business practices,
such as false advertising, deceptive pricing, and poor product quality, can impact businesses
regarding marketing strategies, product development, and customer relations. Compliance with
consumer protection laws is essential to maintain customer trust and avoid legal repercussions.

● Environmental regulations: Companies must adhere to environmental laws and regulations

related to pollution control, waste management, and resource conservation. Compliance with
these regulations can impact operational costs, while non-compliance can result in legal
penalties, reputational damage, and potential harm to the environment.

● Competition laws: These laws aim to promote fair competition in the marketplace by preventing
anti-competitive practices such as price-fixing, market manipulation, and monopolies.
Companies must know these laws to ensure they operate within legal boundaries and maintain a
competitive and fair market environment.

● Tax laws and regulations: Businesses must comply with various tax laws and regulations, such as
corporate taxes, value-added taxes (VAT), and sales taxes. Changes in tax policies can impact a
company’s profitability and financial planning.

7.Suppliers - those who supply the inputs like raw materials and components to the company.
Suppliers have a huge impact on your costs. The clout of any given supplier depends on scarcity: If
you can't buy anywhere else, your negotiating room is limited.

8.Competitors – Competitors are another major external force affecting a firm through its
operations. If the competitor implements a low-pricing strategy or introduces a new innovative
product, it could sweep away your firm’s sales.

9.Customers - customers are the target audience, i.e. the one who purchases and consumes the
product. The power of your customers depends on how fierce the competition for their money is,
how good your products are, and whether your advertising makes customers want to buy from you,
among other things.

10.Distributors There are a number of individuals or firms that help the business enterprise in the
promotion, selling, distribution and delivery of the product to the end buyer, which are called as
marketing intermediaries

Reasons for government intervention in enterprise activities

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1. To control monopoly - A monopoly is when an enterprise dominate/control the market for a

good or service. Monopoly leads to higher prices, reduced quality, and limited choices of
goods/services.

2. To protect the natural environment – government intervene in entrepreneurial activities to

ensure that business are environmentally friendly in their operations

3. To protect consumers – government intervention is necessary to protect consumers from being

exploited by entrepreneurs. Eg being sold goods of low quality, overpricing, false advertising
etc.

4. To protect workers - government intervene in entrepreneurial activities to ensure that

employers maintain a fair and safe workplace environment, protect the rights of employees,
promote fair labor practices, and ensure equal opportunities for all.

5. To decide where enterprises should locate Location decision – entrepreneurs want to locate
their enterprise in the most profitable area. Government intervenes in this decision to
encourage businesses to set up in areas of high unemployment and discourage them from
locating in overcrowded areas or sites reserved for their natural beauty.

6. To prohibit production of some goods/services – government intervene in business activities

to control provision of some goods/services which may be dangerous and/or harmful to people
and the environment.

Ways in which the government controls business enterprises.

By Regulations - Regulations ensure that economic activities run properly. There are multiple
government regulations, each of which impacts economic activity differently. They include:

● Environment law: Governments launch multiple regulations concerning the environmental

effect of business operations on the environment. The introduction of environmental safety
standards is one example.
● Employment law: The government issues laws, rules, and regulations concerning fair
recruitment, wages, and workforce safety and health.
● Competition law: Governments impose certain regulations, for example, mergers and
acquisitions to promote fair competition. Moreover, this category involves deregulation, for
instance, eliminating the limits on foreign investors’ share ownership.
● Consumer Protection law: This category protects consumers from unfair practices concerning
price rules, product descriptions, and safety and health standards.

• Antitrust Laws
Any time a company conspires with its competitors, third-party vendors, or other relevant
parties, it may run afoul of antitrust laws. These are the issues antitrust laws strive to address,
such as: Conspiring to fix market prices: Discussing prices with competitors—even if it affects a
small marketplace.
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Explain ways in which government assist enterprise activities.

1. Tax Relief:
- This can take the form of a reduction in corporate tax rates, or exemptions for certain taxes.
- Tax relief can help to reduce the financial burden on businesses and free up cash flow, which can
be used to pay employees and cover other expenses.

2. Grants and Loans:

..Grants are typically non-repayable funds that businesses can use to cover expenses such as rent,
utilities, and salaries.
..Loans, on the other hand, are funds that businesses can borrow and must repay with interest.
Governments may offer loans at lower interest rates or provide guarantees to lenders to encourage
them to lend to businesses. -

3. Skill Development
- Training Programs: Governments invest in skill development programs and workshops to
enhance entrepreneurial capabilities.

4. Mentorship and Guidance:

- Government-backed programs connect entrepreneurs with experienced mentors, industry experts,
and successful entrepreneurs.

5. Market Access and Validation:

- Government support helps entrepreneurs enter markets by connecting them with potential
customers, industry experts, and investors.
- Example: through a government-sponsored agribusiness expo. These connections validate their
product and lead to sales.

6.Organize and Facilitate Local Hubs

Governments could organise online and physical hubs where representatives of businesses could
come, network with each other, exchange good practices, ideas and identify ways of supporting
each other.
7.Create an enabling environment for businesses. This includes providing the necessary
infrastructure, such as roads, power and water supply, and telecommunications.

8.risk management - Risk management is the set of steps an organization takes to prevent
unwanted events from happening, or at least to reduce the damage of those events when they do
happen.

9.Trade agreements
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