Topic 1: Business Environment – Business Studies Notes Form Five
Understanding the business environment provides relevant insights into the opportunities and challenges in the marketplace. These insights enable businesses to adapt their strategies and operations accordingly. It is therefore critical for businesses of all sizes and sectors to understand the business environment in which they operate.
In this chapter, you will learn about the concept of business environment, business start-ups, and stakeholders in the business. The competences developed will enable you to collaborate with key business stakeholders to establish and operate businesses effectively.
Think
A business operating in a vacuum.
The concept of the business environment
Business environment refers to all the factors influencing business operations and well- being. It helps in recognising business opportunities, identification of required business resources, and organisation of the resources that facilitate business operations as well as performance. This is because the environment in which businesses operate is dynamic and multifaceted. It encompasses a wide array of factors which influence operations and decisions.
Principally, several intemal and external factors create a dynamic context in which businesses operate. Thus, understanding these factors helps businesses to seize
opportunities, anticipate and adapt to changes, and overcome challenges. Imagine an environment where a trader operates a small fruits stall in a busy market.
This kind of business is not just about selling fruits but also will have to consider other things which affect its operation such as the prices of fruits, the weather, the number of customers around, the types of fruits, and even the regulations governing trading in the market place. All these factors that impact the fruits selling business constitute what is referred to as the business environment.
As a way of enhancing the understanding nof the business environment, one can pay attention to what is happening around and how it affects business. By so doing, one
can make better decisions and increase the chances of the business success.
Types of business environment
The environment in which businesses operate can be classified into two main types: internal environment and exteral environment as shown in Figure 1.1. Understanding these types of environments equips business operators with valuable insights about opportunities and challenges, and operational requirements present in their operating landscape. By analysing and adapting to these environments, businesses can formulate effective strategies to thrive in a dynamic business environment.
i. Internal environment
The internal environment of a business consists of all factors within the business organisation’s management control. These factors may include organisational structure, leadership style, corporate govemance, organisational climate, organisational culture, human resources management, and operational processes.
Understanding the internal environment is necessary for assessing the business strengths, and weaknesses, cultivating a culture of excellence, innovation, and resilience. With this, businesses can unleash the full potential of their employees, enhance effectiveness, and achieve sustainable growth and success.
Components of the internal environment
The intemal environment includes a variety of elements, some of which are explained as follows:
Organisational structure: This refers to the framework of responsibilities, roles, hierarchies, communication channels and relationships within the business. It determines how tasks are divided. coordinated, and executed across departments or units. An efficient and flexible business organisational structure facilitates communication, collaboration, and decision-making, enabling the business to adapt to changing market conditions.
Leadership style: Leadership plays a crucial role in shaping the internal environment. Different leadership styles have varying impacts on customer orientation, employee motivation, engagement, and performance. Effective leadership empowers employees, inspires trust, promotes transparency and fosters a culture of innovation and continuous improvement.
Corporate governance: This refers to the system of rules, practices, and processes from which businesses are directed, controlled, and governed. It ensures accountability, transparency, and ethical behaviour at all levels of the business organisation. Solid corporate governance mitigates risks, safeguards stakeholders’ interests, promotes long term sustainability and value creation.
Organisational climate: This reflects the predominant mood, atmosphere, and perceptions within the business organisation. It includes factors such as communication patterns, morale, trust, and employee satisfaction. A positive organisational climate fosters creativity, employee engagement, and commitment, which drive business performance.
Organisational culture: This refers to the shared values, beliefs, norms, and behaviours that tend to shape the work environment and guide employee actions. It reflects the business organisation’s identity, personality, and its core principles. A positive organisational culture fosters unity, cohesion, and creates a sense of
belongingness among employees which results in driving business performance and resilience.
Human resources management: This encompasses all activities related to recruitment, training, development, retention and retirement of employees. It involves all policies, practices, and programs geared to maximise employees’ potential, satisfaction, and well-being. It is, therefore, crucial to have good human resource management practices since a competent and motivated workforce is the backbone of organisational success, driving productivity, creativity, and customer satisfaction.
Operational processes: This encompasses the procedures, workflows, and systems used to deliver products to customers, They define the way resources are allocated, how tasks are performed, and how objectives are achieved within the business organisation. Streamlining and optimising operational processes that boost efficiency, eliminates unnecessary costs, and improves business performance.
External environment
The extemal environment of a business organisation focuses on the extemal forces that influence its operations, decisions, and perfonnance. These are factors that the business has no direct control of the extemal environment represents the dynamic context in which the business operates.
These contexts include economic, social, political/legal, technological, competitive and global environments. By comprebensively analysing and adapting to these factors, businesses can navigate uncertainties, seize opportunities, and achieve sustainable growth and success in business landscape.
Thus, understanding the extemal environment helps businesses to anticipate trends, identify risks, and develop strategies to remain competitive and resilient in the market.
Components of the external environment
The external environment includes a variety of elements, some of which are explained as follows:
Economic environment: This encompasses factors such as market conditions. macrocconomic indicators, and economic policies that impact businesses’ operations and performance. It includes elements such as inflation rates, market forces, Gross Domestic Product (GDP) or economic growth. interest rates, exchange rates. unemployment rates, purchasing power. and overall market demand. These factors significantly influence businesses’ sales, costs, profitability, and investment decisions.
Social environment: This reflects the societal attitudes. trends, health consciousness, values, and behaviours that shape customer preferences, demand, and business practices. It includes demographic factors such as age distribution, population size. levels of income, literacy levels, as well as cultural diversity. Understanding social dynamics helps businesses to tailor their products and marketing strategies to meet the needs and expectations of diverse customer segments effectively.
Political and legal environment: This reflects how the state or government regulates the economy. It encompasses government policies, laws, regulations, and political stability that impact businesses’ decisions and operations. It involves factors such as tax policies, tariff’s, labour laws, consumer laws, safety laws, trade regulations, competition laws, environmental regulations, political will. and intellectual property right laws. Changes in political stability can create uncertainties and challenges for businesses that may require them to adapt their strategies and operations accordingly.
Technological environment: This comprises innovation, advancements in technology. and digitalisation that influence businesses across industries. It includes factors such
as artificial intelligence, automation, information technology. and digital platforms. Embracing technology enables businesses to enhance their performance in terms of productivity, efficiency, competitiveness. innovation of new products, quality of products, and ability to reach customers through digital channels.
Competitive environment: This comprises rival businesses, industry structure, market dynamics, and competitive forces that influence businesses’ competitiveness and market positioning. It includes factors like competitors’ strategies. strengths, weaknesses, and market share. Understanding competitive environment dynamics helps businesses to identify opportunities, differentiate their products, and develop effective strategies to gain a competitive edge in the market.
Global environment: This encompasses international factors, trends, and events that impact businesses as a result of globalisation. It includes factors such as international trade. climate change. ecological aspects, geopolitical risks, cultural diversity, economic interdependence, and cross-border regulations. Principally, globalisation presents opportunities for businesses to expand internationally. access new markets, and collaborate with global partners. Similarly, global environment poses challenges in terms of market volatility, cultural differences, and geopolitical tensions.
Activity 1.1
Visit any business operating in your local area, then:
(a) Discuss with the owner how ICT and globalisation influence his or her business operations.
(b) Explain the business environment factors that may afTect its operations.
Exercise 1.1
1. Justify the need for businesses to explore their internal and extemal environments.
2. Describe the components of the external business environment and explain how cach component impacts businesses in Tanzania.
3. With examples, explain how the internal business environment differs from the external business environment.
Business start-ups
A business start-up marks the onset of an entrepreneurial joumey, where individuals embark on the process of bringing a business idea to life. It involves a series of
steps such as conceptualisation, planning, execution, and growth of a business venture. Start-ups often emerge in response to opportunities, market gaps, or problems that entrepreneurs believe that they can address with innovative solutions. These solutions may range from new products to business models that challenge traditional practices.
Usually, the process of starting a business begins with ideation, where entrepreneurs generate and refine ideas based on market insights, personal experiences, or industry trends. Ideation is then followed by market research where entrepreneurs assess and validate the feasibility and potential demand for their proposed solutions.
Once a viable business idea is identified, entrepreneurs develop a business plan that outlines the business objectives, target market, value proposition, revenue model, and growth strategy. The business plan serves as a roadmap guiding the start- up’s operations, resource allocation, and decision-making processes.
As start-ups gain control and achieve milestones, they may attract extra funding. expertise, and partnerships that will eventually enable them to expand their reach, scale of operations, and capture more market opportunities. Therefore, a business start-up refers to a business in its early stages of operations.
Agents supporting business start-ups
Business start-ups are receiving support from different agents for their establishments as well as operations. Such agents are categorised into two groups namely: movement agents and non-govemment agents. Some of the govemment agents that support business start-ups include Local Movement Authorities (LGAs), Tanzania Investment Centre (TIC), Tanzania Revenue Authority (TRA).Small Industries Development Organisation (SIDO), Fair Competition Commission (FCC), Tanzania Trade Development Authority (Tan ‘Trade), Zanzibar Investment and Promotion Authority (ZIPA) and Micro, Small and Medium Industrial Development Agency (SMIDA).
Non-govemment agents supporting business start-ups in Tanzania include Tanania Private Sector Foundation (TPSF), Tanzania Chamberof Commerce, Industry, and Agriculture (TCCIA), Zanzibar National Chamber of Commerce (ZNCC), and Tanzania Association of Micro-Finance Institutions (TAMFT). Some of these agents are explained in chapter four.
Activity 2
Read the following case, and answer the questions that follow.
Micaela is a young entrepreneur living in Dar es Saluam. She has always been concerned about environmental sustainability and renewable energy. One day. while visiting rural areas outside the city, she noticed substantially limited electricity access, with many households relying on candles and kerosene lamps for lighting.
Inspired by this observation and driven by her passion for green energy, she decided to start her own business focusing on providing solar-powered solutions. She envisioned a business that would not only address energ’y challenges but also promote environmental conservation and economic empowerment.
Micaela began her journey by researching solar technology, market demand, and rural consumer needs. She also reached out to potential customers to gather feedback and validate her business idea. With a clear vision, she solicited funding to kick-start her business. She pitched her business idea to some investors in Dar es Salaam, where she presented her market research findings, revenue projections, and social impact goals, Impressed by Micaela’s passion and business acumen. a group of angel investors agreed to provide seed funding to support her start-up.
Micacla set out to establish her business operations with funds secured as shown in Figure 1.2. She partnered with solar equipment suppliers in the city, recruited a team of technicians, and set up a small office and warehouse in Kigamboni Dar es Salaam. She also designed a marketing strategy to raise awareness about her products among rural communities.
As Micaela’s business gained momentum, she started selling solar-powered lighting; through her official online social media kits; to households in different parts of Dar es Salaam city as well as some neighbouring towns such as Kibaha, Mlandizi, Kisarawe, Mkuranga, and Bagamoyo. Her products were well-received and accepted as they offer families a clean, affordable, and reliable source of lighting. She also introduced innovative payment options to make the products more accessible to low-income customers.
Over time, Micaela’s start-up grew fast, expanding its product offerings and geographical reach. The business attracted the attention of international investors interested in funding its expansion plans. With additional funding and strategic partnerships in place, Micaela’s start-up continued to scale its operations throughout Tanzanian regions, bringing light and opportunity to more communities. It also expanded across East Africa.
Questions
1. Describe Micaela’s initial inspiration for starting her solar-powered lighting business.
2. What challenges did Micaela face during the early stages of launching her start-up, and how did she overcome them?
3. Discuss the strategies she used to secure funding for her business start- up.
4. Describe how ICT can help Micaela to ensure sustainable business performance.
5. Based on what you have leamt in this case, brainstorm and develop a business start-up idea by considering key details such as the target market, product offering, and unique selling proposition.
Skills lab activity
How does the business environment
Stakeholders in the business
Understanding business stakeholders is crucial as it helps businesses to navigate through complex stakeholder relationships, mitigate risks, build trust and credibility, as well as create long-term value for all parties involved. It helps businesses to identify, prioritize, and manage relationships with key parties who have an interest in the businesses’ success or are impacted by its operations. By considering the interests and perspectives of stakeholders, businesses can foster collaboration, make informed decisions, and achieve sustainable success in the interconnected business environment.
In the business context, stakeholders refer to individuals, groups, or entities that have an interest in the activities, decisions, and outcomes of a business. Stakeholders can include a wide range of individuals and groups such as employees, movement agencies, investors, customers, suppliers, financial institutions, communities, and advocacy groups.
Types of stakeholders
The following are two major categories of business stakeholders:
Internal stakeholders: These are individuals or groups within the businesses such as employees, owners, and managers. Internal stakeholders are directly involved in the daily operations and decision-making processes of the business.
External stakeholders: Unlike internal stakeholders, these are individuals, groups, and organisations outside the business entity that are impacted by its actions or can impact its actions. Extemal stakeholders can include movement agencies, customers, suppliers, investors, communities, and advocacy groups.
Roles and interests of stakeholders
The following are the roles and interests of some of the business stakeholders:
Owners: These are individuals who have initiated a business after developing a business opportunity from the business ideas. Business owners mostly contribute initial capital and any other resources needed for a business to start. Again, business owners are affected by the business operation outcomes.
Employees: These are vital stakeholders who contribute their expertise, skills, knowledge, and labour to the business. They have a vested interest in job security, career development opportunities, fair wages, and a positive work environment.
Customers: These are key stakeholders whose satisfaction and loyalty are necessary for the success of any business. They have interest in receiving high-quality products, excellent customer service, fair pricing, and a positive overall experience.
Government agencies: These are government authorities that regulate businesses through laws, regulations, and policies. They have interests in compliance with legal requirements, public safety, and providing necessary services to the public including businesses.
Investors: These are individuals or groups that have invested their stake in a business. They include venture capitalists, shareholders, and lenders who provide
financial resources to the business in exchange for returns on their investments. They are interested in the businesses profitability, growth potential, and the protection of their investments.
Suppliers: Suppliers provide goods or services to the business to facilitate production process and offering services. These goods and services play an important role in its supply chain and operations. Suppliers have interests in fair treatment, timely payments, and long-term partnerships with the business.
Communities: These are stakeholders who may be impacted by business activities, such as employment opportunities, environmental impact, and contributions to community development initiatives. They have interests in sustainable practices, corporate social responsibility, and positive community engagement.
Stakeholder engagement and management
Stakeholder engagement involves identifying key stakeholders, understanding their interests and concerns, and actively involving them in relevant decision-making
processes in the business. This includes seeking feedback, addressing grievances, and communicating transparently about business activities and outcomes.
Stakeholder management involves developing strategies to address the needs and expectations of different stakeholder groups while balancing competing priorities and interests. This involves prioritizing stakeholder concerns, negotiating or compromising, and building mutually beneficial relationships over time.
Stakeholders’ matrix
For effective stakeholders’ engagement and management, it is crucial to understand stakeholder’s matrix. The stakeholder matrix, also known as the stakeholder analysis matrix or stakeholder mapping. This is a tool used by businesses and organisations to identify, analyse, and prioritize stakeholders according to their level of interest and power in a business.
The matrix helps businesses to understand stakeholders’ roles, expectations, and relationships with the business which allows effective communication, engagement, and management of stakeholder relationships.
The matrix typically comprises of a grid with two axes: the level of “Interest” axis and the “Power” axis. Each stakeholder is plotted on the matrix based on their level of interest in the business and their level of power over its outcomes.
Level of interest axis: This axis represents the extent to which stakeholders are affected by or interested in the business. Stakeholders with high interest are those with a significant stake in the project’s success or failure and are likely to be directly impacted by its outcomes. Conversely, stakeholders with low interest may have minimal involvement or be indirectly affected by the business.
Power or influence axis: This axis represents the degree of power that stakeholders have over the business. Stakeholders with high influence are those who possess the authority, resources, or decision-making power to shape the business’s direction, outcomes, or implementation. Stakeholders with low influence have limited ability to directly impact the business’s outcomes.
Based on their placement on the matrix, stakeholders can be categorised into four main quadrants as shown in Figure 1.3.
High level of interest, high power (Key players): These stakeholders have both a high level of interest in the business and significant power over its outcomes. They are crucial stakeholders who must be closely engaged, consulted, and managed throughout the business lifecycle. It is important to involve these stakeholders in the planning process as they have the power to bring a change once satisfied with the plans. Examples include owners, business sponsors, senior management, regulatory authorities, or major investors.
High level of interest, low power (Keep informed): These stakeholders have a high level of interest in the business but limited influence or power over its outcomes. While they may not have decision-making authority, they can still impact the project through word of mouth, support, or contributions. It is essential to keep them informed, engaged, and satisfied to maintain their support. Examples may include community groups, ordinary customers, or local residents.
Low level of interest, high power (Keep satisfied): These stakeholders have significant influence over the business’s outcomes but have minimal interest in the business. They may include regulatory bodies, industry associations, or government agencies responsible for overseeing the business’s compliance or approvals. While their involvement may be limited, their decisions or actions can significantly impact the business’s success.
Low level of interest, low power (Monitor): These stakeholders have minimal interest in the business and little influence over its outcomes. They may include peripheral stakeholders or individuals who are indirectly affected by the project and are not actively engaged. While their impact may be minimal, it is still important to monitor their interests and manage any potential risks or concerns that may arise. These include community groups and advocacy
Once stakeholders are identified and plotted on the matrix, organisations can develop tailored strategies for engaging and managing each stakeholder group effectively. This may involve communication plans, stakeholder engagement activities, conflict resolution strategies, or risk mitigation measures to ensure that stakeholder’ needs, expectations, and concerns are addressed throughout the business lifecycle.
Task 1.1
Think about any business which you would like to establish, explain the key stakeholders of the business and the reasons for their consideration.
Exercise 1.2
1. Consider your school as a business organisation, then:
(a) Identify and categorise the various stakeholders.
(b) Discuss the roles and relationships of each stakeholder group and how they may impact the success of the school.
(c) Develop a stakeholder mapping template and map them according to the stakeholder’s matrix.
(d) After completing the stakeholder mapping exercise, make a group presentation to compare findings and insights, articulating the importance of understanding stakeholder dynamics in business decision-making.
(e) Using Micaela’s start-up as a case study, conduct a stakeholder mapping exercise to identify the stakeholders and their level of influence on her business.
2. Assuming the role of a project manager leading a stakeholder engagement initiative, evaluate the significance of stakeholder mapping in business, including its benefits and limitations.
Establish any form of business in your school environment based on your capacity then assess the role of each stakeholder involved towards the success of that business. Prepare a report about the progress of your business and the contributions of your stakeholders.
Chapter summary
1. Business environment refers to all conditions both internal and external that influence the operations, performance, and decision-making of a business entity.
2. Internal business environment encompasses various components such as organisational culture, leadership style, human resources management, organisational structure, operational processes, corporate governance, and organisational climate.
3. External business environment encompasses various components such as economic environment, social environment, political and legal environment, technological environment, competitive environment, and global environment.
4. A business start-up is the process of establishing a new venture with the aim of bringing products to the market. It involves identifying business ideas, identifying a business opportunity, securing funding, and executing a plan to turn the idea into a viable business.
5. Start-ups often face challenges such as resource constraints, market competition, and uncertainty, but successful ones create jobs, drive innovation, and contribute to economic growth.
6. Stakeholders in business refer to individuals, groups, or entities that have interest in or are affected by the activities and outcomes of a business. They include owners, employees, customers, investors, suppliers, government agencies, communities, and advocacy groups.
7. The stakeholders in business are categorised into internal and external stakeholders. Internal stakeholders are individuals or groups within the business, such as owners, employees, and managers. External stakeholders are individuals or groups outside the business, such as customers, suppliers, government agencies, and local communities.
8. Stakeholder management involves developing strategies to actively address the needs, interests, and expectations of different stakeholder groups. It requires identifying
key stakeholders, understanding their priorities and concerns, and implementing actions to engage and manage their relationships.
9. Understanding and managing stakeholders is essential for businesses to build trust, mitigate risks, and create value for all parties
10. Stakeholder engagement is the process of involving the stakeholders in relevant decision-making processes and activities. It helps businesses to build trust, enhance relationships, and achieve shared goals and outcomes.
11. Stakeholder mapping is a strategic tool used by businesses to identify and analyse stakeholders based on their level of interest and power. It involves categorising stakeholders into different groups and plotting them on a matrix to prioritize engagement and management efforts.
12. Stakeholder mapping helps businesses understand their stakeholders’ perspectives, needs, and expectations, enabling more effective communication and decision-making.
Revision exercise
1. In your opinion, how does consideration of the business environment contribute to making informed business decisions? Provide examples from both local and global contexts to support your arguments.
2. Evaluate the influence of technological advancements on the economic environment in Tanzania.
3. Discuss the importance of understanding the business environment in Tanzania.
4. Synthesize the key differences between the economic and political environments in Tanzania and provide recommendations for businesses operating in this context.
5. In your opinion, what are the essential qualities that aspiring entrepreneurs need to succeed in the business start-up process? Provide examples of successful entrepreneurs in Tanzania to support your arguments.
6. The majority of business start-ups encounter issues with stakeholder management, particularly with suppliers and customers. Provide advice on how they can improve stakeholder engagement strategies to build stronger relationships and mitigate potential conflicts.
7. Use relevant examples to explain the contribution of business stakeholders to the overall success of the business.
8. Analyse the role of employees as stakeholders in influencing organisational culture and performance.
9. Explain how businesses can use communication channels to engage stakeholders and convey their messages effectively.
