Competency Levels

Constructs the basic foundation to ensure the effectiveness of the rules and regulations of the state on business.

  • Factors of the Business Environment
  • Government influence
  • Government rules and regulations

Learning outcomes

  • Lists the External and internal factors of the business environment.
  • Gives a simple explanation of the influence of the government on business.
  • Presents government rules and regulations over businesses.
  • Explains how business activities become efficient through the influence of the government and rules and regulations.

Business environment

Any business has an environment related to it. The factors within the business
or outside the business affect the existence of a business either directly or
indirectly. Hence, the business environment can be defined as the environment
in which the factors affecting businesses are activated. The businesses require
undergoing changes continuously due to the fact that environmental forces are
also dynamic and businesses need to adhere to them.
For a business to be successful, it is essential to pay constant attention to its
environment. New business opportunities can be identified through the changes
in environmental forces and different trends arising in the environment.Therefore,
successful businesses continuously study the business environment and adopt their
business activities accordingly.


Classification of business environment

The business environment can be classified mainly as follows.

  •  Internal environment
  • External environmentThere are different parties and forces present in both the internal and external
    the environment of a business. This chapter discusses only the following parties and

Internal environment
Different parties and forces acting within a business and affecting a business are
known as the internal environment. The parties within the internal environment and
their impact over the businesses are depicted below.


Owners are the persons supplying the required capital for a
business. Their financial strength, business knowledge and
experience will lead to the success of a business.


Managers are the persons taking decisions to direct the
resources of a business in order to achieve the objectives
of its owners. The managers are responsible to build a good
relationship between the customers and the employees of a
business. In certain businesses, owners will also be the managers.


Employees are persons who duly perform their tasks
assigned using their own skills and competencies. Their
dedication and good attitudes also matter for a business to
be successful.

External environment
Different parties and forces acting outside the business and affecting a business are
known as external environment. The impact of these external environmental factors
to a business is depicted below.

Customers buy goods and services from a business. The survival of a business
depends on its customers. Therefore, businesses are required to identify different
needs and wants of customers and satisfy them appropriately. The changes in the
buying patterns of customers will have a close impact over the activities of a

Competitors are the businesses producing goods or services, which are similar
to the goods or services of another business. The way, competitors conduct their
business activities, price and quality of the competitor’s products, marketing
techniques, etc. would closely influence a business.

The parties providing required raw materials and other services to a business are
known as suppliers. It is vital to supply raw materials and other services at the right
time and to provide quality raw materials to ensure continuous operations of a business.

Political environment
In a country, the policies of a government will have an influence on businesses.The
businessmen have to conduct their businesses by considering these policies. The
following are some examples for government policies.

Legal environment
The legal environment consists of laws and regulations, enforced in order to protect
consumers, to protect domestic manufacturers and business community and
to protect the environment. In addition, the government appoints institutions,
boards, commissions and responsible authorities and individuals to enact these
laws. The following are some examples for such laws and regulations.


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